Like it or not, we may be seeing the return of banks to mass-market advice. We need to be a little careful about how we characterise this return. First of all, there is a significant wedge of bank advisers in existence, around 3,500, with brands such as Nationwide Building Society still in the market.
Never having disappeared completely may be a good thing, on the basis that those left will tend to be among the most compliant (with regulations, not the demands of their sales director).
But numbers may be set to rise again as others follow Santander and return to investment advice, so it’s worth asking the question: what do banks have to do so as not make a hash of things again?
To answer that question, I suggest we need to understand what happened to provoke the original retreat. Banks were convinced that the adviser charge they would have to levy to be profitable post-RDR made servicing all but the most high-net-worth customers impossible.
Even prior to that, however, the industry’s poor advice caused huge brand damage and fines. It also prompted them to review their sales and advice processes and pay redress.
One senior figure in high-street banking told me a few years ago that their company’s advice division was astonishingly successful in terms of profitability. Those profits would be swallowed up a few years later as the advice proved unsuitable or even detrimental.
What must banks do to not make a hash of investment advice this time?Now we have to add in the new regime for senior managers, seeking to emphasise their responsibility. As former regulator and Aifa chief-turned-consultant David Severn pointed out recently, the stakes for senior bank management of getting the advice business wrong are much higher these days.
That will concentrate minds, to some extent. Maybe the banks believe the tougher regime will save them from themselves.
More likely, they believe that the regulatory environment is going to become easier for them.
They might expect a simpler channel with a safe harbour on liabilities, or even a lower suitability test. The latter would surely provoke outrage among investment advisers.
Or the banks may believe that technology – whether the full robot or involving some human input – will enable them to address both cost issues and, by designing out poor outcomes, the regulatory issues.
Those poor outcomes previously stemmed from the wrong products, wide differentials in adviser remuneration relating to products and funds, and the wrong culture. It may not only be the robot’s wiring that needs fixing.
Yet if you successfully remove many of the risks above, the next question is: where can the banks make a profit?
It could be through fund management charges, via a restricted range of products, but this is not a huge amount if Santander’s low-charging price structure sets a precedent.
It might also be through adviser charging – perhaps brought down to acceptable levels for the customer by technology.
But I am still a little sceptical that this time things are different.
John Lappin writes on industry issues at www.themoneydebate.co.uk
