By the time you read this, the outcome of the Financial Advice Market Review (FAMR) could well be known. The treasury (and we think it’s very significant that FAMR is being driven from there, not Canary Wharf) has stated it will be confirming its findings from the consultation period before the Spring Budget on 16 March. This consultation lasted three months – less the Christmas break – so they clearly are not up for much debate. Things are about to change.
One of the main objectives of FAMR is to deliver improvements in the accessibility, availability and adoption of advice. The government is concerned that a key voter demographic – sorry, I meant hardworking families all over this great land…ARRRGH done it again… The population are not saving enough for their future and that an advice gap has appeared over the last few years. You can pluck your own estimate from thin air as to what level of savings this gap represents, although common consensus is that anyone with less than £75,000 to invest is going to struggle to find a financial adviser who wants to work with them.
However, it is not as simple as the level of investable assets. Research from Citizens Advice Bureau has shown it is more nuanced that that, with availability, awareness and affordability issues all contributing to the overall gap. The affordable advice gap is the most widely recognised category, with 5.4m people being more likely to pay for advice if it were cheaper. If £450 is the typical cost of advice for investing £15,000 in an Isa, then 80 per cent of people surveyed wouldn’t pay a penny.
Over recent weeks there have been rumours regarding possible solutions to address this advice gap, with the suggestion of a reintroduction of commission being the most widely discussed. It kind of makes sense. If advice does cost £450, and the customer won’t pay it, then why not allow the adviser to be paid by other means? While there is a certain logic to this, there is one fatal flaw to this master plan. The customer will always end up paying one way or another.
Using a simple example, if a client is advised to purchase an Isa they will end up being charged roughly 35bps for the platform fee, 75bps for the investment solution ongoing charges figure and, say, 50bps for advice, thereby making a total charge of 160bps. These are just rough example charges, so stick with me if they don’t feel right, however here’s the rub: If this 50bps advice charge is no longer paid directly by the customer as an advice charge, then where does it come from? Who pays the commission?
Neither the platform provider, nor asset manager are going to want to fund this commission without a) putting their charges up to make it revenue neutral, and b) sharing these costs with each other. This means platforms and asset managers would need to develop new charging structures and new commission-loaded share classes. The RDR rules, banning advisers from receiving payments from providers would need to be reversed, alongside the imminent sunset clause changes. Basically, we wind the clock back almost 10 years and start again.