The intermediary sector may have a surplus of around 5,000 individuals, a review of the potential size of any ‘advice gap’ as a result of the RDR has found, though it adds changes prompted by the new rules could be disenfranchising mainstream consumers.
Modelling work undertaken by Towers Watson on behalf of the regulator and based almost entirely on Financial Conduct Authority data relating to advice demand and adviser numbers, suggests there was a need for a little more than 25,000 financial advisers in the UK.
The report, published alongside the two-year post-implementation review of the RDR, cites the latest regulatory data which shows there are more than 31,000 individuals with a statement of professional standing confirming they are qualified to deliver advice.
Separate data from Matrix Solutions suggests there are around 28,000 advisers actively operating in the UK; Towers Watson used an estimate figure of 30,000 based on a rough average of these two assumptions.
While this points to excess capacity of around 5,000 advisers, the report states that a move away from transactional and to holistic advice, which the authors claim takes longer to service, is more costly and represents the minority of demand, could have resulted in a “mis-match” at the “lower end of the mass market”.
It says: “A potential concern... may be the 17 per cent of initial advice demand that the model implies should emanate from segments that are also, intuitively, least likely to be financially attractive to service... [which] may therefore, between them, represent a source of advice demand that is difficult to fulfil economically.”
Figures for advice demand were calculated based on modelling of 10 defined consumer segments identified by the FCA and intermediated sales data obtained from the Association of British Insurers and the Investment Management Association.
A large number of assumptions were made, including in relation to the amount of time advisers had for giving advice (60 per cent, with the remaining 40 per cent dedicated to administration and marketing), as well as in relation to the time needed to provide ‘transactional’ and ‘holistic’ advice.
The authors estimate that approximately 3.4m clients would seek initial advice each year with around 79 per cent of demand thought to be transactional, which the authors said would account for four hours of an adviser’s time. Holistic advice was thought to take up around eight hours hours.
In addition, a little less than 2.8m are estimated to need legacy ongoing advice, with transactional advice again dominating at 75 per cent of demand and taking just one hour per case. The remaining 25 per cent of holistic demand would equate to around three hours per case, the authors claim.
In both cases more than half of this demand was coming from three categories covering wealthy retirees, affluent workers and those deemed ‘stretched but resourceful’.
A number of caveats were set out based on “limitations” in the scope agreed with the FCA, including that future demand arising for example out of the new pension freedoms was not modelled, and that primary research into supply and demand dynamics such as advisers’ client segment focus was not undertaken.
Despite these factors potentially undermining the core finding that there is not an ‘advice gap’, Towers Watson stresses that “no single assumption change would be capable of producing an advice capacity shortage” unless it was at such a level “as to be intuitively very unlikely to be correct”.
It stated that to produce a demand for 37,000 advisers, around 7,000 above current assumed levels, 10 per cent more initial advice cases would need to be holistic, case time for all advice provided would need to be 10 per cent higher, and assumptions such as the number of advice cases which do not result in a sale would need to be uprated, in this case from 30 to 50 per cent.
In its post-implementation review, the FCA says: “There is little evidence that the availability of advice has reduced significantly, with the majority of advisers still willing and able to take on more clients.
“However, by revealing the true cost of advice, the RDR has led some consumers to consider the extent to which the advice they receive represents value for money, and in some cases conclude it does not.
“This is not necessarily a bad thing and for many consumers the decision that advice is not worth paying for at true cost may be the right one, given the amount they have to invest and their experience and knowledge of the market. We will also continue to monitor advice provision going forward.”
ashley.wassall@ft.com
