Advisers and industry experts have called into question what is thought to be one of the most fundamental negative outcomes to stem from the RDR – the creation of an advice gap.
The advice gap, defined as those who cannot or will not pay for full regulated advice, has been widely accepted as an inevitable consequence of clients paying an upfront fee for the advice they receive, rather than paying through the cross-sub-sidy-based commission model.
The advice profession is currently braced for proposals that would make advice more accessible and affordable for all under the Financial Advice Market Review. But concerns are being voiced that attempts to plug the so-called advice gap are more concerned with providers being able to serve mass market investors, rather than helping a cause for the common good.
There are also questions about whether those investors that are said to fall into the advice gap want or even need a full advice service in the first place.
So is the talk about finding a solution to the advice gap simply a smokescreen for providers to tout their wares once more? Is there a genuine need for full-blown advice beyond the clients already served? Or has the FAMR been tasked with solving a problem that does not really exist?
The extent of the problem
In the FAMR call for input, published jointly by the FCA and the Treasury in October, the consultation asks for evidence on “the extent and causes of the advice gap for those people who do not have significant wealth or income”.
In its response, which Money Marketing reported last week, the Consumer Panel argued there is no evidence of an advice gap, in that there is not a glut of savers looking for advice that cannot get it.
Consumer Panel chair Sue Lewis said: “Consumers do not always seek professional advice, even when they could benefit from it: some are not aware of what is available; they do not want to pay for advice because they do not understand the price or value of it; they cannot afford it; or they prefer to take decisions themselves.
“We would emphasise that financial advice is the same as many other professional services. People pay for professional services in other areas, such as for accountancy advice. Some people can afford this, others can’t.
“Services are accessible to those who need them at the market price.” Yet fellow consumer group Which? believes the advice gap is a real issue, given the barrier of the cost of advice.
Figures obtained by Money Marketing show that based on 1,000 UK adults with between £10,000 and £50,000 available to invest, Which? found 58 per cent of those against using an adviser cited advice as being too expensive. One-third said they would not trust an IFA to act in their best interest.
But the Which? data also suggests the demand for advice is not as high as some would believe.
The research found 67 per cent of respondents have never considered using an adviser for advice on a specific investment.
The FCA is not commenting on FAMR-related issues until the proposals are published in the Budget in March. But it points to a raft of estimates on the advice gap, commissioned in December 2014 as part of the RDR post-implementation review. These range from a stated advice gap of up to 5.5 million consumers, as cited by Deloitte in 2012, to no advice gap at all, as estimated by Towers Watson in 2014.
“I don’t believe in the advice gap. What people are often referring to is a product sales gap, widened when the banks left the ‘advice’ market.”
Threesixty managing director Phil Young argues efforts to tackle the advice gap should be more concerned with encouraging savers to top up their pension, which he says is not the role of advice.
He says: “A lot of the debate seems to be assuming there is an advice gap, in terms of traditional financial advice as we know it. In very broad terms, it’s never been easier to invest for retirement, and never more complicated at-retirement. For me, proper advice is required more at-retirement, hence the creation of bodies such as Pension Wise.”
Young explains with a cap on pension charges, workers being auto-enrolled into a pension, and increased Isa limits, there are less obstacles to deal with that require advice. He points out those who are challenged by pension contribution limits or tax planning issues are the very people who can afford to take advice.
Young adds: “Professional advice 10 years ago centred around choice of tax wrapper and provider. There’s little to be gained from that now, but motivation to save is still an issue. This should be resolved by better online tools, marketing and information, and there may be a gap for some sort of ‘advice’ which is closer to old fashioned sales to motivate higher contributions.”
Informed Choice managing director Martin Bamford goes further, claiming the gap is one created by providers when they exited mass- market advice, rather than a lack of supply of proper financial planning.
Bamford says: “I don’t believe in the advice gap. What people are often referring to is a product sales gap, widened when the banks left the ‘advice’ market because their staff were in the main poorly qualified and did not have a transparent charging structure. Those who need and value advice, rather than product sales, can find it from IFAs. Any product sales gap left by the banks can easily be filled by online discount brokers.” He notes some of the early-stage proposals to come out of the FAMR process, as first reported by Money Marketing, but says such measures should not be introduced for the sake of plugging the advice gap.
He adds: “Before moving to restore commission or water down standards generally, it is important we establish precisely which groups of consumers are struggling to access advice and how they would be best served by the market.”
The advice gap – but not as we know it
Some industry stakeholders believe the argument around whether an advice gap exists is more nuanced than a simple yes/no response.
Apfa director general Chris Hannant cites work from Citizens Advice which argues there is not one but many advice gaps.
Citizens Advice breaks down the advice gap into three distinct groups: those who can afford to pay for advice if the price is right; those who cannot afford advice; and those who are not engaged with financial services and do not know they need advice.
Hannant says: “Advice can mean giving investment advice or selling a savings product, or it can mean the client and adviser sitting down, looking at the client’s life goals and working out what is best for them. Everyone could certainly do with the latter, and then there are those that also stand to benefit by saving a bit more. The FAMR may bring about an outcome that ticks the savings box, but I’m not sure it ticks the financial planning box.”
He admits helping savers manage their money does not necessarily equate to a full advice service, and the pool of potential advice clients is inevitably narrowed based on the number of people that have money to invest.
But he says: “As part of the FAMR, if we can get the advice market working better for that first group of people that can afford advice, that will expand the number of people advice is helping. That comes down to lowering the cost of advice. For the second group it is about getting effective financial guidance, and for the last group it comes down to improving financial capability.
“There is an advice gap, but the help and support savers need depends on where they are sitting. The gap depends on how you are defining advice, and the solutions are different depending on who you are talking about and what their needs are.”
The Association of British Insurers agrees with the notion that the advice gap does exist, but across a range of measures. ABI assistant director for conduct regulation James Bridge says: “It is quite subjective about where you draw the line and where you see the advice gap. Our working position is there is the potential for an advice gap for those with up to £100,000 to invest, be that cost, availability, or even consumers’ understanding of what exists.
“We are not focused purely on the provision of regulated advice, but how you can get information to consumers and give them the information they need. We feel there is more to be done around regulatory barriers and advice in the non-advised space. It is more about the provision of and access to advice, rather than products.”
Retirement Intelligence director Billy Burrows suggests the advice gap is evident in the lack of demand for advice. He says: “The important point is there is a vacuum or ‘no man’s land’ which exists between those who are able to make good decisions on their own and those who take advice. People who find themselves in this vacuum don’t know where to go for help, guidance or advice and will not properly engage with the important issues and therefore may make the wrong decisions.
“There may not be a gap in terms of supply and demand because there is enough adviser capacity to satisfy the current demand. The problem is there does not appear to be enough demand.”
He adds: “Advisers and the FCA do not have to compromise on the important aspects of advice and suitability but they can make the process more customer-friendly and cost-efficient. It is vital the advice vacuum is filled or we risk a whole generation being left out in the cold.”
Tim Page, director at Page Russell
Research I have seen says the main reason for cost is not regulation but the cost of acquiring clients. The issue is people do not value or need advice. Rearranging the deck-chairs does not affect the trust issue. There are advice gaps but they are intentional – the FCA does not want to make it easy for people to get advice in certain areas and they are using advisers as a way of putting controls on risky areas.
Bhupinder Anand, managing director at Anand Associates
There is definitely an advice gap because we are turning away people in the past we would have seen. A lot of advisers are setting the bar for new clients much higher than ever. It was predicted pre-RDR there would be members of society disenfranchised from advice. That prediction has not taken long to come to fruition. Based on that definition, absolutely there is an advice gap.
The need for advice is very evident, but demand has not always been so evident. Apart from insistent clients looking to transfer, there are not lots of consumers looking for an adviser.
There are a whole range of contributing factors about why we have seen a reduction in demand, and some of those are aligned to the retrenchment in the financial services sector.
The public has been dissuaded from advice in an environment where it is easier to borrow than save, and amid a constant barrage of misselling scandals and fines. Few companies have promoted or marketed the value of advice, and obviously that also impacts on demand.
On the debate about whether an advice gap exists, there is no question there is a needs gap, and a habit of longer-term saving has to be restored.
If the demand is not there, then the argument about whether there is an advice gap or not is a fair one. But the reason the Government has instigated a review of the advice market is it recognises there is an immediate demand for advice which has been stimulated by its own pension freedom reforms. There is also an underlying demand to re-establish a healthier savings market.
The pension reforms are here and now, but the Government does seem to recognise its responsiblity in bringing in some form of long-term savings culture to the UK. There is no question that while the freedoms will generate a certain amount of revenue for the Government, they will also be stripping away a degree of wealth that will not be available in the future.
That has to be addressed, and the only way to do that is to create a more vibrant market and positive culture towards savings.
Keith Richards is chief executive of the Personal Finance Society