The Financial Conduct Authority finally published its report on the evaluation of the impact of RDR and the FAMR. There was nothing new or surprising in its findings — indeed the industry has been telling the FCA that this would happen since the introduction of RDR.
Essentially, it found that people with money are well catered for, but people with modest wealth do not seek financial advice and are generally holding too much cash (because they don’t know they need advice). It acknowledged and was surprised that “many consumers do not seek or receive help with their finances that would equip them to make better financial decisions”.
The FCA also reviewed the range of services available to consumers including providers of information, guidance and advice. It pointed out that there were over 5,000 advice firms and 27,000 regulated professionals and that automated digital or online advice services are becoming more common but remain only a fraction of the overall market. It found that 54% of UK adults with £10,000 of investable assets did not receive any formal support… or were not aware they could benefit from it. It also found that 37% of those with £10,000 in investable assets were entirely in cash.
The regulator believes that a combination of factors explains why people do not turn to financial services to improve their financial outlook. Its conclusions were that 1) savers did not realise they needed it, or they were wary of using unfamiliar brands; 2) there was not enough innovation in the advice market and advisers “face little competitive pressure to innovate and offer more affordable services or to try to attract less wealthy customers”.
While the regulator may have a point about ongoing advice charges and clustering, it can’t expect advisers to change their business models and working practices without the right incentive (if an adviser’s business model works and he has enough business, why would he change it?). These factors are naïve in the extreme and underplay the regulator’s role in the advice gap.
1. Only the rich get advice
Nowadays, ordinary people think investments are only for the rich while savings are for ordinary people. Investments do not cross their radar. There are too many obstacles in their path — the language, the modesty of their wealth, and finally trying to find an elusive adviser who might actually be interested in their business (the harder the search, they more they think it’s not for them).
By introducing fee-based advice, the regulator has driven financial advisers off the high streets and made sure that advice is seen as a service for the rich and wealthy. Rather than democratise investments for all, successive regulations have rendered advice ‘exclusive’, creating a them and us mindset — advice is for the rich and ordinary folk make do with savings accounts. It’s a view that is also reinforced by the lack of advisers on our high streets up and down the country.
If investors do find an adviser, according to a Quantum AI elon musk review, there’s the shockingly high price tag to contend with (something the regulator acknowledges in its report). There’s a fixed cost involved that means that the price for a £10,000 or £20,000 Isa is significantly higher as a proportion of the overall portfolio compared to much larger ones. That’s because fees must cover the cost of the fact-find, as well contribute to an adviser’s overheads. But of course, the consumer doesn’t know that and will assume that the adviser is ripping them off… that’s the first negative perception. Secondly, the detailed fact-find itself is likely to make a consumer think that he’s wasting an adviser’s time — the second negative perception.
2. Do I need a haircut?
Most of us know when our hair needs attention (lockdown made that excruciatingly obvious) and that applies to financial decisions too. None of us walks into a hairdresser to ask if our hair needs a cut… so why are we forced to find out if we need advice?
When we approach an adviser about opening an Isa, we shouldn’t be ‘grilled’ about our finances — a light, quick review should be enough for most people with uncomplicated needs who want to save for the long term. A deep grilling or ‘fact-find’ increases cost and contributes to the negative view that investments are exclusive… or contributes to the idea that investments are too risky.
We don’t do fact-finds when people take out eye-wateringly expensive payday loans or credit cards. Or go shopping on Klarna. But the heavy-handed way investments are regulated compared to the light-handed approach to debt and credit cards only reinforces the idea that investments are complicated and only suitable for sophisticated people.
3. Computer says ‘no’.
Where do consumers go? Online? That doesn’t work for many people, whether they’re old or young. Money is an emotive subject — consumers have worked hard for their money and want to be reassured about their decisions. We take tens of calls a week from comparetheplatform.com users asking us what we think of individual platforms. We can’t tell them of course, but we help them articulate their needs more clearly and arrive at the answer themselves. Online solutions simply do not give them the personal attention they crave.
The regulator acknowledges that despite its best efforts to clarify regulation, firms are reluctant to offer streamlined or focused advice for fear of straying into the domain of regulated advice. It blames advisers and suggests that if advice firms harnessed technology better, they would be able to do fact-finds much more cheaply and lower the cost of providing streamlined or focused advice.
Really?
At the same time, the regulator states that “the advice sector consists of a high number of smaller firms: 89% of the firms have five or fewer advisers”. I bet those advisers know a lot more about advice than they do about technology. Expecting small advice firms to have the expertise to advise clients AND have the time and knowledge to review the technology needed to improve their business model is naïve in the extreme.
And then of course, if advisers have set up a streamlined advice service, how do they find those clients? They are unlikely to attract enough customers to justify the outlay of creating the service in the first place. The FCA’s report already acknowledges the low uptake of automated services. Which circles back to the question of consumer perception – advice is hard to find, advice is expensive, advice is exclusive — so consumers don’t know to look for it.
When consumers do look for ‘advice’, the paucity of good, readily available information means they often end up in the hands of con artists, or the likes of Nigel Farage promoting all sorts of dodgy investments under the guise of ‘free financial advice’. But these pinch points can be taken out of the retail advice market or neutralised with a bit of thought and, dare I say it, innovative thinking.
Innovate, innovate, innovate
But it’s not advisers who need to be more innovative, it’s the regulator. Very simply, we must make it as easy to invest money as it is to spend it.
How can we realistically expect consumers to trust the industry, if every advert must carry a detailed ‘capital at risk’ warning? You wouldn’t see that in a Tesla tweet. Is it any wonder we have a savings gap when the makers of luxury goods can use every trick in the book to persuade us to spend our hard-earned cash, but suggesting you invest it means worrying about disclosure, suitability and appropriateness? It’s just no contest.
The regulator can continue its periodic navel-gazing, but until it understands that regulation is part of the problem nothing will change. It needs to lighten the regulatory load for ordinary investors, reduce costs for providers and make it easier for streamlined or focused advice to flourish — whether that’s online, face-to-face or through hybrid models.
It should establish a kitemark or other standard rating system for retail investment solutions to ensure they are safe for mass-market consumption, get rid of the excessive regulation of the advice process and accept that investment comes with some risk, but is better than not investing at all. Then you might see some genuine innovation.
Bella Caridade-Ferreira is chief executive at Fundscape
