There have been more than a few claims this year of the unintended consequences of the retail distribution review and their impact on investors, advisers and providers.
Those that have affected advisers and providers have been given wide coverage in the trade press, whereas the impact on the consumer has yet to be vocalised. More accurately the impact on those consumers who are not happy to pay ongoing fees for financial advice has yet to be vocalised.
In the widely reported survey by JP Morgan, Winning Propositions: The Consumer Market Post-RDR, 81 per cent of respondents said they would seek financial advice with only 19 per cent preferring the self-directed route.
The parameters which were used in the survey filtered respondents to include only those with a household income of more than £50,000, placing them in the top 25 per cent of UK households by income.
However in the same survey only 13 per cent of respondents were willing to pay ongoing fees for advice with two-thirds preferring to pay task-based fees. Sadly we have no insight into the remaining 75 per cent of households and their attitudes to advice.
Advice charging models offered following RDR broadly fall into three types. The first is a three plus a half model contingent on a product being put in place, a little like the legal model of ‘no win no fee’.
This reflects the old commission-style model and rewards the adviser for advice and ongoing service. The second is a more heavily-based trail model, either on a percentage of assets or a retainer with 0.5 per cent/0.75 per cent/1 per cent a year and appeals to advisers with more mature businesses with clients of above average wealth.
Finally there is the hourly-fee model, which usually includes project fees for financial reviews and other tasks. Some adviser firms are offering a combination of these options to accommodate client preference. One thing that all these charging models have in common is that they produce client types which are not economic for the adviser business.
Investors who are attracted to these adviser charging models will already have significant levels of liquid assets and are probably approaching the decumulation stage of their lives. Those investors who are in the accumulation phase of their lives are less likely to be attracted.
Interestingly under a commission-based advice model it was much easier for advisers and clients to engage during the accumulation phase and indeed this engagement has contributed significantly to the assets under administration of many adviser firms.
Many advisers have built businesses by helping clients grow their wealth by regular savings in Isas, Peps, pension plans and regular savings vehicles. Without commission, advisers starting out today will find this a harder market to serve.
Clients seeking to save, say £100 a month, are highly unlikely to be willing to pay an adviser fee of £100 an hour. The economics of the transaction may in the long term provide a client benefit of substantially more than the cost of the advice but the client is highly unlikely to engage.
Advisers working on the three plus a half model are unlikely to be willing to process fees of £3 a month and may be challenged to do so by bank charges. Even where this is achievable the cash-flow strain is likely to be off-putting to most firms. This leaves wealth accumulators struggling to find an adviser and, in turn, threatens the accumulated wealth market of the future.
Shortly after the end of the Isa season this year there were reports that sales had fallen dramatically with 2012/2013 sales at half the level they were in 2011/2012. It reflects a general fall in savings in the UK in this period.
According to the Office of National Statistics, the savings ratio was down from 7.7 per cent in quarter four of 2011 to 6.7 per cent in quarter four of 2012. The cause of this downward trend cannot be laid at the feet of the regulator or advisers since it is part of a broader decline in savings in the European Union and eurozone. The solution to reversing this trend, however, is unlikely to be found among the adviser community.
The UK government is seeking to reduce welfare dependency and part of the solution will be to increase household savings. Not only is a healthy savings ratio needed as part of a reduction in welfare dependency, but it is vital to a sustained economic recovery as it promotes more private sector investment. The problem facing the government is how to encourage savings without adviser engagement.
Investors have benefited from savings advice historically in two ways: being encouraged to choose the correct savings plan at the outset and being encouraged to keep saving during economic downturns. In the post-RDR world this encouragement will need to be supplied from somewhere other than financial advisers. Where then does a potential saver go for help?
For many the answer will be to seek ‘advice’ from a trusted friend. Having just gone through the biggest regulatory upheaval in financial services it would be more than a little ironic if one of the unintended outcomes was a massive rise in unregulated advice. Having pushed advisers to level-four qualifications it cannot be in anybody’s interest to have completely unqualified (albeit well-intentioned) people supplanting them.
There is a role for the Money Advice Service in providing help and assistance. According to its web site: ‘We are an independent service, set up by government to help people make the most of their money, we give free, unbiased money advice to everyone across the UK – online, over the phone and face to face.’
Mas will need to fulfil two criteria before being able to play its role in increasing savings. The first of these is to encourage adoption of savings products and the second is to dramatically increase its profile. At present the Mas website provides help to explain why savings are necessary for an emergency and a range of tools that are really quite useful in planning savings. It does little to engage with the client emotionally in a way that will result in a change of behaviour. It needs to tackle the ‘disturbance piece’ that any sales or marketing professional would recognise as essential to change a consumer’s behaviour.
At present it provides factual information but to really have an impact it needs to influence a change of attitude. The issue of profile is a separate one – few people I speak to have heard of the Mas. Whether it is to fulfil its current brief or to play a part in helping increase savings, Mas needs a much higher profile. A Google search for Mas comes up with Malaysian Airlines, Manufacturing Advisory Service and the Monetary Authority of Singapore as the top three suggestions.
In the post-RDR world it seems that the vast majority of savers will be faced with the choice of unqualified advice or no advice. Neither outcome is desirable for the long term, nor is it in the interests of the financial service industry, the economy or the public. Government, regulatory authorities and financial services firms need to work together to find a solution.
Richard Leeson is a director of D&W Management Consulting
Key points
In a survey by JP Morgan 81 per cent of respondents said they would seek financial advice with only 19 per cent preferring the self-directed route.
Advice charging models offered following RDR broadly fall into three types: three plus a half model, a more heavily-based trail mode and hourly fees.
There is a role for the Money Advice Service to provide help and assistance
