Your IndustryOct 29 2015

Filling the advice gap

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Filling the advice gap

Earlier this month, the Treasury and FCA published their ‘call for input’ into the Financial Advice Market Review.

Pioneered by the financial secretary to the Treasury, Harriet Baldwin, the review has set out with the admirable objective of improving consumer access to financial advice. The government has issued an open invitation to advisers to submit opinion and evidence by 22 December which will inform any policy output for the review.

Today, we have a professional advice industry; advisers need to be accredited, trained and pass exams. It is not unlike other professional services in which the UK is a world leader, such as legal services or accountancy – but the perceptions are not the same.

There are fewer than 25,000 financial advisers in the UK, compared with over 30,000 two years ago. Meanwhile there are 150,000 legal professionals and 330,000 members of accountancy bodies. So while the demand for professional advice is growing, there are too few providing the service. Meanwhile the challenge of serving those at the lower end of the market is similar to the challenge of providing legal services to those who can least afford it. And, similarly, the sector has to work alongside government in finding sustainable solutions.

The FAMR consultation refers to the ‘advice gap’ as a key focus of the review. This in itself is a positive first step, recognising publicly that there are problems with consumer access to financial planning services, and that we would all benefit from improved availability of advice. Equally pleasing is that this promises to address both sides of the advice gap equation, by examining supply and demand.

Looking for a moment at the issue of healthy consumer demand for advice, the review recognises that not everyone sees the benefits of financial advice as readily as they might. The review paper suggests that “making consumers more aware of the long-term benefits of seeking financial advice could help stimulate engagement among those who have a need for assistance but are not currently willing to pay”.

Benefits

Encouraging consumers to consider the value of advice, rather than simply the cost, would be a significant step forward. The benefits of advice are often not felt until many years into the future, perhaps when the security of comprehensive protection cover ensures stability of household finances during a difficult period, or when a sustainable retirement income strategy continues to support individuals throughout their lifetime after work.

We are all hard wired to place additional value on prosperity today, and struggle to defer reward until tomorrow. Advisers are well positioned to help consumers understand the value of investing for the future, but they must command a fee for doing so, and the value of that service may not become apparent to the consumer until much later.

As the consultation document puts it: “Some consumers may find it hard to gauge the value of advice because the benefits are usually deferred over time and more intangible than for purchases of non-financial products.”

Addressing this problem will be challenging, but acknowledging that there are problems with consumer perceptions of the value of advice is an important first step. If the problem can be tackled and more consumers begin to see added value rather than simply cost when thinking about taking advice, the net outcome will be positive for the industry and consumers.

Moving on to issues relating to the supply of advice, the consultation document makes a welcome upfront acknowledgement of the reality of providing advice today.

In 2007, the paper explains, two-thirds of retail investment products were sold with the support of a professional financial adviser. Since then, however, adviser numbers have fallen and the market for face-to-face advice has tended to focus on decumulation and customers with more significant savings. As the consultation paper states, “it appears that a number of those firms offering advice are focusing more on wealthier customers rather than the mass market”.

The review goes on to identify a number of different factors prohibiting firms from making advice more widely available to the mass market.

Chief among these are the costs of providing regulated advice, which have increased significantly in recent years. Along with the increased cost of training and qualifications since the launch of the RDR, regulatory levies and the associated costs of regulation continue to be a challenge.

Pressure

This creates significant pressure on margins, dampening supply. Most obviously, it leaves limited capital with which to invest in growth, new staff, new offices and increased marketing activity. Likewise, much of the increased cost is passed on to the end customer who, as we know, sees cost as a major barrier inhibiting them from accessing advice.

Aside from the issue of cost, a number of other factors discourage the provision of advice to the mass market. The lack of a long-stop in the sector, for instance, is cited as an area for consideration. The review recognises this “may act as a disincentive to new firms entering the market”.

As well as pledging to explore consumer appetite for advice (demand) and issues affecting the availability of advice (supply), the consultation paper makes particular reference to “the impact of technology on how people engage with financial services”.

So-called ‘robo-advice’ has grown rapidly in recent years, in the US in particular. This catch-all term describes not just regulated advice delivered through an online system, but also the variety of apps and websites offering to help consumers understand their personal finances more easily.

Efficiencies

The review states that the government is “particularly keen to understand how the regulatory environment can be supportive of technology-based advice models that can meet consumer needs at low cost.” It is easy to see how a blend of digital and face-to-face advice might appeal to some consumers and could help to create efficiencies in the advice process.

But we know that many firms feel reluctant about offering simplified advice beyond Isa investments, for example, for fear that it may come back to haunt them.

At a time when the role of digital technology is not yet fully clear – hence the inclusion in this consultation – there is an opportunity to shape or refine the ‘regulatory framework’ in order to ensure technology can successfully be integrated into the advice process, to the benefit of both clients and advisers.

Many other issues are at stake in the consultation document, not all of which can be summarised here. A final important factor to be aware of, however, is that the review is not restricted to regulated advice, but to all forms of support which might play a part in consumer financial decision-making. Professional advisers have a crucial role to play, but it is important that the industry engages with the consultation and explain that role clearly in order for that role to be fully appreciated.

Richard Freeman is chief executive of Intrinsic, part of Old Mutual Wealth. He sits on the Financial Advice Market Review expert panel in a personal capacity

Key points

Earlier this month, the Treasury and FCA published their ‘call for input’ into the Financial Advice Market Review.

There are fewer than 25,000 financial advisers in the UK, compared with over 30,000 two years ago.

The government is particularly keen to understand how the regulatory environment can support technology-based advice models.