Advisers have said the Financial Conduct Authority's plans to create a new style of advice that is “not intended to carry [the] obligations of an advised sale”, to help smaller investors who are not currently well served, need refining.
The document outlining the new advice plan, called the "Potential guided sales model in development – draft for discussion", was sent to industry bodies such as Pimfa back in September 2021 for review. The aim is to reduce the barriers to advice suffered by smaller investors.
Simon Harrington, head of public affairs at Pimfa, says: “The FCA estimates that nearly 9mn people are holding £10,000 or more of investable assets in cash. While some of these people will have reasons for doing so, we take the view that many of them simply do so because they are either unable to access an investment product or are unwilling to do so.
“The reasons behind this are behavioural but they are also clearly a function of a lack of knowledge. We agree that reform of the route to market for investment products is long overdue and broadly welcome the FCA’s focus on simplifying the journey rather than the product.”
Proposals
While it is not easy to take a firm view of the proposals until the full details are published, Pimfa welcomes them in principle. This, says Harrington, is ultimately a simplification of a sales process rather than a simplification of the advice process.
He adds: “We harbour some scepticism that it will adequately overcome the behavioural barriers some savers will have towards investment products, which ultimately need to be addressed through the provision of support. Money is ultimately emotional and simplifying the sales process won’t really address that.”
Did RDR create the problem?
Derek Bradley, chief executive of Panacea Adviser, feels this advice gap was created directly as a result of the Retail Distribution Review, and that many advisers had warned this would be the outcome before the RDR had finished.
Bradley adds: “The impact of RDR on the affordability of advice for the general consumer was shouted from the rooftops by the industry well before it started. At Panacea, we even had 2 MPs attend a Panacea conference on the concerns about RDR – Harriett Baldwin and Mark Garnier.
“We sent in a consultation response, got a mention in the report but nothing else. Nobody listened, nothing was done by the government, who had also been bombarded to stop the then FSA from banning commissions. This single act of ‘told you so’ stupidity made advice unaffordable overnight.
“Nothing can or could replace access to face-to-face financial advice. That is why the often under pressure world of the IFA has lasted so long despite the best efforts of regulation to destroy them.”
Harrington agrees that RDR has made it more difficult for advisers to provide cost-effective advice, but says there is more to it than that. For example, the other major factor is that from a macro perspective, the only age demographic that has received a real-term pay rise since the financial crisis is UK pensioners.
Scope to diverge
Add to that the current suitability requirements, which create a real cost barrier for advisers looking to help investors with smaller amounts to invest. But Harrington does think there is some scope to “diverge” from suitability requirements “to ensure that an individual receives a good outcome, which is better than doing nothing at all” and staying wholly invested in cash.
He adds: “A more streamlined process, which provides the support savers need, would move the dial more towards advice than what we currently have, which is sales.”
The existing system certainly does not help those with smaller investment amounts or relatively less need for ongoing advice, according to Alex Lambert, external relations manager at Hargreaves Lansdown. This advice model does not necessarily suit client needs and could be tweaked to address this.
One size does not fit all
Lambert adds: “Traditional advice services are set up to suit the adviser, not the client. Advice is expensive, pricing out the majority. In our experience, lots of people don’t need ongoing annual reviews, meaning they’re getting poor value for money at best, and in most cases, end up paying for something completely unnecessarily.
“There's certainly no one-size-fits-all offering, and the best advisory services should put clients in control of where and when they take advice, and on what issues. It should be possible to dip in and out of advice as needed, which may mean long periods of time between getting advice.”
This is one of the reasons Hargreaves Lansdown has moved towards a system where it uses tailored messaging and nudges and more personalised guidance to help investors diversify their portfolios.
Lambert says: “We have evidence this works through our Better Investors programme… but we’d like to do much more. With 1.7mn clients, we’ve amassed 12mn client years of data over the past decade, and we want to better use this data to improve client outcomes.
“To achieve this shift, the rigid rules around regulated advice need to be updated to reflect modern communication methods, and the way in which we can use data analysis to improve long-term investment outcomes. We believe it is possible to flex the advice rules to allow for more helpful tailored content, within a framework that also ensures consumer protection.
“As it stands, the advice/guidance boundary gets in the way of our ability to engage our clients using targeted messaging and guide them to better outcomes, and for clients who wish to dip in and out of advice, they should be able to do so seamlessly.”
Barriers to advice
Advice is over complicated, too expensive, inaccessible or oversimplified and lacking a human touch in the case of robo-advice, says Lambert.
But given our propensity to use technology to do everything from check the weather to pay for goods and services, there is considerable scope to use technology to help augment the advice process and make it more inclusive.
Bestinvest, for example, has created a dual process to help to bridge the advice gap with some free person-to-person investment coaching, and also specific fixed price one-off advice packages starting at £295, depending on what is needed.
It splits coaching and financial advice, with the former about offering education and guidance “to empower people to make better investment or financial decisions”. The latter recommends what you should do, as opposed to outlining your options for you to make your own decisions.
Jason Hollands, managing director of Bestinvest, adds: “There is an advice gap in the UK between wealthier people who can afford personalised financial advice and those with more modest savings who do not have access to professional advice or perceive it to be too costly for them – even though they do not have total confidence in their choices and decisions.
“Coaching is typically aimed at those whose finances are not so complex – a group of people who have historically been underserved by the financial advice industry. While a lot of information and opinion is available online – and among social media influencers or down the pub – the plethora of voices can be overwhelming, confusing and sometimes misleading. So, coaches aim to cut through the fog with clear, best-practice guidance.”
Increasingly, it seems advisers are content to offer clients what they need in the format that they need it. While this may go against the “norm of traditional advice offering”, notes Lambert, some people just need a helping hand “to guide them in the right direction from time to time”.
Move towards technology
However, a greater move towards the use of technology in advice needs to be addressed from a regulatory perspective too, says Panacea's Bradley, with the FCA deciding where the liability lies if the advice goes wrong in “10, 20 or 30 years’ time”.
Bradley adds: “If technology is the solution, then technology must carry the liability and not the advisory firm who uses it. To make it work, the FCA should, rather like the pharma or aviation world, certify that the algorithm technology is fit for the purpose.
“That would mean the FCA – [akin to] the CAA of the aviation world – test flying themselves along with the manufacturers. Think Boeing, think Max 8. It’s not the airlines that are responsible, is it? It’s Boeing.”
One key element to overcome is helping people who have never experienced advice to understand the benefit of it, which is not easy and may be insurmountable if people are “dead set against accessing advice”, says Harrington.
He adds: “It’s important to build an infrastructure that can support them. To this end, these proposals will be extremely valuable. Going forward, we believe there is scope to empower providers to be able to nudge people towards better solutions, or solutions which are potentially more appropriate for their needs, beyond what they are able to do now.
“What is ultimately clear, and welcome, from these proposals is that we are finally moving away from a regulatory approach where firms are required to produce products that are good enough in order to mitigate poor decision-making, and towards an approach where supporting decision-making is at the forefront.”
Alison Steed is a freelance journalist
