How to reach those people who currently fall into the advice gap continues to be debated at length across the industry.
Whether the Financial Advice Market Review (FAMR) recommendations will address this key issue remains to be seen, and we will be watching this space avidly. What might be a sore point for some advisers is that the findings come after the government gave over-55s the flexibility to withdraw their entire pension pot, but banned IFAs from offering ‘free’ advice funded by commissions from product providers.
As a result, a growing proportion of the population is currently disenfranchised or feels excluded from the advice market. Only 17 per cent of the population are currently using a financial adviser, according to BlackRock’s latest Investor Pulse Survey, and it appears that the general population does not have access to affordable financial advice at a time when more and more people need it.
I recently spoke at an industry event where I looked at what the future advisory model in the UK might look like, and how the industry could work together to provide support for those who fall into the advice gap. These themes prompted some very positive discussions, which now need to evolve and form part of a solution over the coming months.
I see the UK market falling into a four-channel advice framework. This model is not static (it should not be, the industry needs to be more dynamic), and has flexibility to adjust over time to become more sophisticated as customer needs change.
The four channels:
Channel 1: Simple non-advice products capable of direct-to-consumer web-based distribution
My future advisory model sees product providers returning to a limited direct-to-consumer (D2C) offering. These are very simple non or self-advised products distributed via the web. Many people have talked about robo-advice as a solution to the advice gap, and it has the potential to provide the perfect vehicle for simple non-advised products.
However, although robo-advice and the sale of simple web-based products have an important role as part of the solution, it is unlikely to be the silver bullet many would wish for. Traditionally, these types of products have been sold rather than bought, and therefore the challenge for product providers is creating awareness of these solutions among consumers, challenging apathy and getting those same consumers to self-activate the product solution themselves. A tough call.
As these products will not offer advice in the traditional sense, this is not a segment of the market advisers can target effectively. As a result, simple non-advised products are not a panacea for the advice gap issue.
Channel 2: Kitemarked advised products
In some ways this is a step back in time to products which were designed to a state-prescribed format and qualified for defined tax benefits, such as UK-qualifying life plans. Compared to most advised products sold today, these Kitemarked products would have a far more rigid structure in terms of meeting defined suitability criteria, maximum payments, agreed disinvestment points and a sales remuneration structure that focuses on rewarding product longevity as well as the initial sale. For individuals meeting the strict and verifiable entry criteria set, these should be products that, due to the kitemarked structure and rigid product parameters, would be pretty hard to mis-sell.
These types of products will not be suitable or ‘best advice’ for everyone, but instead represent ‘good enough’ advice for the majority, and should not result in bad or harmful advice. The key issue is whether the government would stand behind such a structure or whether the product providers could be licensed to do the same. In the absence of valid alternatives, this option should be given some mature consideration.
Developments in this area are a work in progress, and creating a kitemark for financial guidance is among six recommendations outlined by The Savings and Investment Policy project, aimed at rebuilding a culture for saving. I believe kitemarked products will be key to plugging the advice gap in future.
Channel 3: Fee-based or adviser-charged advised products
This is the dominant channel of advice in the UK. However, as a result of the Retail Distribution Review, it is not commercially viable for many advisers to target anything other than asset-rich clients. Advisers are therefore limiting their reach to those who are not yet commercially viable to target, but may be in the future.
While this channel addresses a key audience who need advice, it is important that advisers adopt a multi-advice channel model to broaden client coverage and boost the long-term value of their businesses.
Channel 4: ‘Experienced Investor’ advised products
Finally, at the top end of the market, there should be an advice option (as there is today for the certified high net-worth individual) that allows people with verifiable levels of wealth or income to effectively opt-out of the normal consumer protection regime and undertake investments that would not be appropriate for retail customers.
If a client has more than £500,000 of liquid disposable assets and/or earns more than £500,000 a year for more than five years, why should they be restricted by a consumer protection regime intended to prevent payment protection insurance mis-sales?
So what will this look like?
All four advice channels can co-exist to achieve the maximum coverage across the different consumer groups, delivering to each an appropriate form of advice at the most cost-effective rate. Fee-based will, in my opinion, continue to dominate, but will be supported by channels one and two going some way to filling the advice gap. Channel four, for the more sophisticated investor, will occupy a rather smaller piece of the pie.
Advisers looking to broaden their audience could be active in three of the four advice channels. For example, by employing ambitious juniors and graduates to sell kitemarked products, advisers could broaden their reach to consumers whose needs fall into channel three or four at a later stage.
Advisers who are open-minded and happy to embrace a multi-channel approach for their services are more likely to succeed. This is likely to lead to bigger firms, with a scalable business model, covering the broader skills necessary to offer all relevant advice channels and to meet all the relevant client needs. This includes the right service for clients moving between channels, while accepting that some clients will want to self-serve.
Whether I am right or wrong, financial advice, as we know it, must expect some sort of evolution over the next couple of years, and the government must engage with the industry in firming up a viable solution.
Simon Willoughby is head of proposition of AXA Wealth International
Figure 1.1 – What the future advisory model might look like
1 Simple non-advice products capable of direct-to-consumer web-based distribution
2. Kitemarked advised products
3. Fee-based or adviser-charged products
4. ‘Experienced Investor’ advised products
Key points A growing proportion of the population is currently disenfranchised or feels excluded from the advice market. Robo-advice and the sale of simple web-based products are unlikely to be the silver bullet many would wish for. All four advice channels can co-exist to achieve the maximum coverage across the different consumer groups. |
