There are 32 million working people in the UK. Those are people who would benefit from financial advice, to help them get on the property ladder, protect themselves and their families and of course build up an adequate retirement pot. But there are only around 23,000 advisers to service this growing market.
Of particular concern to the Financial Conduct Authority (FCA) and HM Treasury are those people who fall into the advice gap. They will almost certainly need advice but may not know where to get it or be prepared to pay for it.
The recently launched Treasury consultation to amend the definition of financial advice is an attempt to encourage advisers to provide guidance. Up to now they have declined to do so, fearful that their guidance could be interpreted as regulated advice.
Guidance may come at a lower cost than full financial advice, so it could appeal to the part of the market most at risk of falling into the advice gap. This would be a good outcome if it could be achieved.
It is worth reminding ourselves how we got here, if we are to navigate a way out of this conundrum successfully.
The advice gap was created by a mix of factors. It is largely a result of poor regulation in the form of the retail distribution review (RDR), made worse by the widespread inclination to spend and the reluctance to save.RDR means that consumers must now pay for advice. That is alien to most people who have ever had an adviser. Around three-quarters of the population have not used an adviser in the last two years and cost is the number one reason, according to research by True Potential.
Yet despite the emergence of direct-to-consumer channels in recent years, we have yet to reach the tipping point in financial services where consumers are prepared to go it alone in large numbers. People are comfortable buying shoes, handbags, the weekly shop, TVs and almost anything else online, so why is it that they are still unwilling to buy a pension or an Isa in the same way?
We are not a nation of savers and becoming one will require advice, or perhaps guidance. We have found from True Potential polling that savers are prepared invest up to £1,000 via a computer but beyond this they wish to speak to a human, but then the cost barrier kicks in.
I believe that this attempt to clarify where guidance ends and advice begins is partly about addressing advisers’ concerns that they may fall foul of current regulation, with its blurred lines. Risk aversion in the adviser market is understandably widespread, no doubt fuelled by the former head of the FCA’s ‘shoot first, ask questions later’ mantra.
But it may also be an attempt to kick-start the stalling self-directed market.
The RDR has pushed many advisers to seek wealthier clients where they can be confident that their advice is needed and can be paid for.
It seems to me that some are banking on ‘robo’ to ride to the rescue for everyone else but the signs are that even here consumers will need some help. The real value that an adviser provides is knowing the consumer, their needs and their aspirations and being able to offer the full end-to-end service. So if advisers could be persuaded to expand their offering and provide guidance services where appropriate, that would be a good thing with more people getting help to do it themselves.
A ‘robo’ or a quango can never have the relationship that the consumer really needs.
The central element to this consultation is the attempt to shore up the definition of financial advice by adopting the EU’s MiFID definition. That says that a personal recommendation must be involved to qualify as advice.
It may reassure some advisers and of course we welcome any efforts that make the language of financial services clearer for the adviser and the end consumer. I am less convinced, however, that on its own it will make a meaningful difference to what actually happens in the market.
Unfortunately, there is little detail in the consultation, which is disappointing having waited for it for six months since the Financial Advice Market Review reported.
The question of who pays for guidance and how, must be answered and there is nothing in this consultation that gives clarity on this.
If an adviser were simply to guide a client through a range of options, that may not lead to a sale, who would pay the adviser? I see no evidence that the same people who are unwilling to pay for advice would be prepared to open their wallets for guidance.
If guidance is about stimulating the direct-to-consumer market, is a client who has decided to go self-directed likely to be prepared to pay for guidance?
That only leaves the product provider who cannot pay the adviser under RDR rules for advice, but may do so for guidance. But if no sale occurs as a result of the guidance is it not unlikely that the product provider will pay the adviser? This is a fundamental question that remains unanswered.
Then there is the issue of unauthorised firms setting up specifically to provide guidance, under lighter touch regulation than that covering adviser firms. We do see huge potential for rogue practices here so we propose a simpler solution.
Guidance services should be offered by product providers, and no one else. It would be clear to the consumer how the person providing the guidance is being paid and firms offering the service would be regulated. Consumers who prefer to save and invest themselves but need some help to get started, could find guidance without the costs that put them off.
The saving gap in the UK is enormous. Research by True Potential shows that the difference between what an individual is on course to receive in retirement and what they would like is about £17,000 a year. The only way to close that gap is to make sure people see that they need a solution and also to make them want one, by showing the good that can be achieved.
Anything that helps reach that goal has our support and clarifying the language is a good starting point but there remains much work to do. After all, bad regulation to fix earlier bad regulation helps no one.
David Harrison is managing partner of True Potential
Key points
The advice gap has been a long time in the making.
We have yet to reach the tipping point in financial services where consumers are prepared to go it alone in large numbers.
Guidance services should be offered by product providers and no one else.
