In Focus: Profitable advice business  

There is scope to diverge from suitability requirements

Liz Field

Liz Field

For years our industry has recognised that the advice gap has widened and continues to do so.

This is made worse by the existence of a curious anomaly within the advice profession.

Advisers say they concern themselves with providing ‘good’ outcomes for clients. But, in fact, suitability requirements and the need to provide a personal recommendation oblige advisers to provide the ‘best’, or at the very least, the ‘most suitable’ outcome for clients.

While this is an inherently good thing, the anomaly it throws up is that providing the best outcomes for clients doesn’t come cheap and so a large proportion of those that would benefit most from advice hardly ever receive it.

Until now the debate around closing the advice gap has coalesced around whether the definitions of advice and guidance need to be reviewed.

Pimfa believes reviewing these definitions won’t be enough and we are now calling on the industry, government and Financial Conduct Authority to seek a solution to the widening advice gap so that a greater number of people, and specifically to those who would benefit from it most, are able to access advice in the future.

To that end we have published a policy paper that we hope will start a wider debate on how we provide advice to more people.

The cost of advice is one of a number of barriers preventing less affluent consumers accessing it.

And yet the ILC-UK's value of advice report in 2017 has demonstrated that those on lower incomes benefit most from professional advice.

Less affluent consumers, however, rarely access advice because they feel they cannot afford it or do not appreciate the benefits of advice.

Thanks to past well-publicised scandals they also distrust advisers and, as result of past economic crises and shocks, many simply fear investing. 

Advisers themselves have contributed to the widening advice gap and for sound reasons. Since the introduction of the Retail Distribution Review, advisers have increasingly focused on higher net worth clients.

Research commissioned by Canada Life in 2019 showed that only 16 per cent of advisers would take on a client with less than £100,000, compared with 50 per cent just five years earlier.

The cost of providing advice has increased, effectively pricing a large number of smaller investors out of the market with one of the major drivers of that cost being determining suitability for individual clients. 

As a result, only a small percentage of UK savers who could reasonably benefit from financial advice do so.

Millions of people therefore are either not participating in saving and investing because they lack the support they need or are making complex financial decisions without it.

A third way

There is certainly merit in reviewing the definitions of advice and guidance and certainly scope to look at what is reasonable for businesses to be able to do when they are communicating with their existing clients and customers.