In March 2016 the Treasury and the FCA reported following a major review into financial advice to establish how the market can function better for consumers.
Having thrown out the old financial advice model based on commission, hidden costs and hidden conflicts of interest, politicians and regulators have realised something financial advisers have been telling them all along. The new fee based model only works for the wealthy and wise. The cost of fee based activities is prohibitive for the majority of consumers.
“The review will consider the current regulatory and legal framework governing the provision of financial advice and guidance to consumers and its effectiveness in ensuring that all consumers have access to the information, advice and guidance necessary to empower them to make effective decisions about their finances.”
A laudable objective but one that was doomed from the start. If all consumers are to be able to make effective decisions they must be equipped with the knowledge, skills and tools to do so. The task is one that starts at school not in later life. If the Retail Distribution Review (RDR) demonstrated anything, it was that advice is costly. Under the pre-RDR commission based system the cost of advice was hidden by the often large commissions paid by product providers to financial advisers to remunerate them for recommending the providers product. Without the cross subsidy of Robin Hood type commissions and the larger investment commissions cross-subsidising the cost of advising on and arranging smaller investments, total costs (advice costs, platform charges, product charges) often outweigh the benefits of taking the advice itself. Particularly for the cautious investor client. Low returns coupled with high costs of advice and high product and service charges can mean taking advice is not in the client’s best interests.
Getting to know enough about a client in order to deliver competent financial advice takes time. A comprehensive review of the market, takes time. Recording what has been done and why it has been done also, takes time. Time is money and by and large the customers that are the target of the review don’t seek information, advice or guidance if it costs money. Fees are fine if you know you have a problem. Plumbing problems, even legal problems tend to manifest themselves in clear, immediate and practical ways. The need is clear as is the solution to the problem and the cost of implementation. But providing for pensions, life cover and planning for the future can all be put on hold. Especially if the consumer has student debt, rent or a mortgage to pay, not to mention living costs and an occasional holiday.
In its own paper on Simplified Advice (March 2012) the then FSA recognised that 49% of the population do not have enough savings to cope in an emergency. These customers have an immediate need and generally will not be seeking to pay for financial advice.
For those who work hard, do the right thing but do not have significant wealth, there is a need to avoid the danger that advice may simply become a remuneration contract for the adviser, potentially adding additional risk to savings and delivering no added value. The fact is that for many consumers who do not have significant wealth, the cost of financial advice is not affordable and the value added in investment terms, after charges and fees, is questionable. Short cuts in the advice process or lowering standards will only lead to poorer customer outcomes.
Those without wealth make do when choosing a car. They rarely buy new or top of the range, often foregoing the warranty protection offered with a new car and take the risk on servicing and other costs. In seeking to protect consumers, regulation has arguably increased the standard (perhaps another debate) but in doing so has put financial advice out of the reach of those targeted by the review – the mass consumer.
Affordability of Advice
Affordability is recognised as a problem and streamlined advice is a solution, beyond that and the observation that technology will help, the review came out with no firm commitments.
Access to Advice
Lack of accessibility through high cost and lack of trust in advisers was considered with an emphasis being placed on developing advice through the workplace.
Unquantifiable liabilities for past advice and potential consumer redress were seen by some as a barrier to developing alternative advice offerings. Rightly, in our view, if consumers are to be protected standards cannot be relaxed, nor can consumer protections be weakened. Indeed, it is not in the interests of the professionals for it to be otherwise as, longer term, levies and compensation costs will only rise.
Solution to the Advice Issue
The answer has to be in trying to take cost out of the advice process. There are at least two potential ways in which this can be approached.
Cost Reduction via Technology
The first is to use technology to automate much of the time consuming and labour intensive tasks involved in the collection, collation and analysis or financial data from the consumer. Much of this information is factual and can be readily compiled from personal and household documentation. This can be achieved by providing software tools for a client to collate and store such data for use by their adviser.
Technology and software tools can also be made available to allow clients to self-explore objectives, financial priorities, investment risk attitudes and investment risk tolerance i.e. the ability to absorb temporary or permanent losses.
The information provided by the consumer can assist the financial adviser to assess whether they can assist them, whether to accept them as a client and if so at what level of fee. In this manner the technology can remove much of the labour intensive and thus very costly but relatively low value work carried out by the financial adviser. There may still be a need for an experienced professional to interpret or review certain information, but at least this is a value adding task and not routine information gathering.
A further use of technology can deal with two other areas of the advice process that are often problematic if not sometimes contentious.
The disclosure of information required to be provided to prospective clients can readily be given (and recorded) using on-line delivery. Similarly, Client Agreements and/or Terms of Business can be produced, in bespoke form where required, delivered and agreed to via on-line means. Traditionally, this has also been a necessary but relatively labour intensive part of or precursor to the advisory process.
Similarly, gathering sufficient evidence regarding the identity of a client to satisfy the requirements under the Money Laundering Regulations is often time consuming and confusing for many clients. However, most people (including those who may not have a passport or driving licence) now use a mobile phone, which in most cases is a “Smart phone”. Most smart phones now have the ability to securely store identity data, which can be verified by a central data verification source, eg, the data network, utilities providers or even local government or central government agencies. (As an example the Road Fund Licence is now normally renewed on line, with no requirement for paper documents or third party certification.) Indeed, the modern smart phone is beginning to serve as a banking tool or electronic wallet. This provides the basis for a digital verification of identity that in turn can take labour and thus cost out of the advice and client engagement process.
The development of platform technology and mobile computing and applications brings such tools within the realms of being deliverable at a cost that can be readily absorbed by the product and/or platform provider(s) meaning distribution and use by the consumer can potentially be free of charge.
In much the same way that common protocols were agreed in numerous other areas of technology, it is entirely feasible that common formats could be agreed between product and service providers and regulators. This would facilitate mass use by consumers, with data and attitudinal information stored, collated and analysed in common format, for use by advisers.
The second approach is that of introducing simplified products suited to and designed for relatively simple and straightforward financial planning objectives. At present most products are designed for and aimed at relatively well-informed clients or those who must rely on the advice of a financial adviser. They are generally relatively complex and are not designed with the objective of being simple, transparent and designed to meet relatively simple needs at low cost.
There is ample evidence to suggest that selecting star fund managers is not an easy task – even for seasoned financial professionals. There is also much evidence to suggest that charges and not the fund manager alone, are a very significant determinant of medium to long term fund performance, with low charges often being a very significant factor behind longer term fund performance.
Just as has happened in the area of Workplace Pensions, the compulsory introduction of products that meet mandatory requirements in design, charges and fees, access to risk rated asset classes, liquidity and portability would assist consumers to better understand the savings and investment options open to them.
The Treating Customer Fairly (TCF) initiative rolled out by the FSA was supposed to promote the development of fit for purpose products. However, it is clear that relatively little development has been undertaken by product providers to bring forward simple and low cost savings and investment products for consumers.
Of course, just as turkeys are unlikely to vote for more Christmas Days in the year, the investment houses, banks, pension companies and life assurance providers are unlikely to voluntarily re-vamp their business model to more effectively meet consumer needs. Such a change will not happen without regulatory and consumer pressure.
It must surely only be a matter of time before either consumer and regulatory pressure builds or before a major financial institution realises its potential to steal a march on its competitors and re-engage along the lines described with the mass of consumers who are arguably excluded from financial advice by the consumer perception of disproportionate cost to value.