OpinionMar 6 2023

'FCA proposals not a silver bullet to advice gap issues'

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'FCA proposals not a silver bullet to advice gap issues'
Just 7 per cent of advisers surveyed recently said they were hoping to offer core advice. (FT Montage)
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By the 16th century, the plague was a familiar foe in the UK.

During outbreaks in Elizabethan times, various measures were taken in an attempt to prevent its spread. Bonfires were lit in the streets of London in an effort to purify the air. The Queen ordered the ringing of church bells throughout the city in an effort to drive away the bad spirits believed to be the source of the problem.

Putting this simply, the authorities of the day were trying to solve the right problem, but they had the wrong solutions.

Credit to the Financial Conduct Authority, core advice is an attempt to address the huge challenge of getting more UK savers to invest. The FCA estimates there are more than 4mn people that hold more than £10,000 in cash and have some appetite to invest. 

We harbour serious reservations about whether the core advice proposals will help to solve the problem.

As a firm we strongly support the regulator’s overarching aim of encouraging people who might have ‘excess cash’ to invest that money for the long-term, in line with their risk appetite and financial goals. 

But we harbour serious reservations about whether the core advice proposals will help to solve the problem. In fact, they may create unhelpful unintended consequences. 

A new advice market?

The regulator’s solution to the problem is to introduce a new tier of financial advice, with a narrower scope and scale. Core advice will act as a transaction-focused, entry-level service for customers that cannot afford full advice and are not confident enough to self-serve with a DIY platform. 

It will be limited to advice on new subscriptions into stock and share Isas, with the advice limit set at the Isa annual subscription limit – currently £20,000 a year.

Although the nature of the advice given can be ongoing, the expectation is that the vast majority of core advice will be one-off, transactional interactions. 

The consultation proposals do not specify a fee cap but point toward a fee of around 1 per cent being the norm.

At a practical level then, it is worth asking whether there is a viable market here.  

I worry that firms providing core advice will encounter both regulatory complexity and a lack of economic incentive.

The FCA’s own research suggests most customers would be willing to pay £100 for advice on a £10,000 investment (that is, a 1 per cent one-off fee). If this proves to be the case, for most advisers, this would not come anywhere near covering the overheads associated with giving such advice.

Unsurprisingly then, just 7 per cent of advisers we surveyed recently said they were hoping to offer core advice. 

The reality is that there is an excess of demand from customers with sufficient accumulated wealth for the holistic advice service provided by these whole-of-market, independent advisers. If your core service is in high demand, where is the attraction in an opportunity where the scope of that services is narrow and your revenue is limited? 

The supply of core advice is more likely to come instead from larger institutions under a bancassurance style model operated at considerable scale. This creates a danger that we see a return to a product sales-focused environment, which in turn increases the risk of mis-selling and poor customer outcomes.

While I appreciate the consumer duty should help mitigate this risk, it is important to acknowledge the incentives introduced by the economics of core advice.  

When would core advice be suitable?

If the problem is customers holding ‘excess cash’, then how much of that excess cash should be invested through the core advice regime?

The proposals suggest excluding Isa top-up and transfer advice, except for transfers from cash Isas. What if the customer already has an Isa and would be better off topping up that Isa? What if the customer would be better taking out a Lifetime Isa? What if the customer could be topping up a pension? How much cash is excess cash? How much should be kept for that rainy day?

Will the layman recognise the limitations of core advice? Can they distinguish between a narrow service versus a holistic advice offering?

I worry that firms providing core advice will encounter both regulatory complexity and a lack of economic incentive when faced with these questions. In fact, the likely prevalence of ad-valorem charging structures could create an incentive for the outcome to be as large an Isa contribution as possible.

An army of orphans

There is also a real danger that these proposals create an army of orphan clients. 

Clients should find themselves invested in a diversified investment portfolio that meets their needs in the moment. But thereafter they will need to self-serve, unless they are inclined to seek-out another transactional ‘core advice’ session at additional cost. 

There must, therefore, be a danger that customers start off their investment journey on a steady footing but that ongoing support is lacking. 

Undermining advice

Industry insiders will recognise the vast difference between core advice and a holistic financial plan. Core advice will be limited only to a single tax wrapper, will be delivered by lesser qualified advisers, and offer a fact-find and advice process that is far narrower in scope. 

While it may be logical to facilitate this simpler service for those with straightforward needs, there is a danger that what the industry views as a clear distinction is not so clear to consumers. 

There was no silver bullet solution that saw off the plague. The FCA and the wider industry needs to take a similar multi-pronged approach.

Will the layman recognise the limitations of core advice? Can they distinguish between a narrow service costing a few hundred pounds, versus a holistic advice offering that will cost more? We fear many consumers will struggle to differentiate and will simply come to see both as ‘advice’, blurring the boundary in the eye of the customer.

The risk here is that the immense value of a holistic financial plan is undermined. 

A better way forward 

Returning to our analogy, there was no silver bullet solution that saw off the plague. The disease was eradicated over time due to a combination of quarantine measures, improved sanitation and medical advances.

Given the size of the advice gap, the FCA and the wider industry needs to take a similar multi-pronged approach.

Currently, the market provides well for two groups of customers. Firstly, clients with some element of accumulated wealth who value the benefits that come from a financial adviser. Secondly, confident DIY investors that are happy to self-serve.

The solutions should initially be focused on expanding the reach of the industry participants who serve those customers well, before creating an additional regime to try and plug the gap.

The proposed core advice regime is an acknowledgement that the existing rules create a regulatory burden that constrains the supply of holistic advice to consumers. 

Efforts should be made to identify and remove the rules that unnecessarily increase the regulatory burden on advisers, so the cost of holistic advice can be reduced and its reach in the market broadened.

Where the market cannot economically provide customers with advice, it should not try to do so in a watered-down form.

Instead, it is critical the FCA now sets out clearly how it intends to proceed with its promised advice/guidance boundary review, which has the potential to improve outcomes for far more mass-market customers. 

Michael Summersgill is chief executive of AJ Bell