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Financial advice only relevant to a small minority
A consensus has formed that the provision of financial advice should be more professional. Selling products to people is bad, charging them for advice is good and financial advisers themselves should become “professionals”.
I go along with this and I approve of diploma-style exams and customer-agreed remuneration. I also agree with duty of care and the whole professional kit and caboodle, especially the ethics.
Where I part company with almost everyone else who opines in these pages is that I think this model is only relevant to financial advice and financial advice itself is only relevant to a small minority of the population.
I reckon a maximum of 15 per cent of the people in this country have complex financial problems for which they need financial advice. The rest just have specific needs, which they can address by buying one or more financial products. For them, the current system of regulation produces bad outcomes, which will get worse after 2012. It would be better if we let people sell them the products they need.
Regulating the advice process for people who only have a few specific needs has become a matter of dogma and regulatory overkill, with costs vastly out of proportion to any potential benefit.
Until you have a lot of money, financial choices are not nearly as difficult as they are cracked up to be. Saving money for the long term?
Pension or Isa? Family protection? Term, family income benefit, critical illness cover or income protection? Mortgage? Fixed, variable, offset, interest-only or repayment?
Most people can work their way through these choices. My question is, what is wrong in principle with allowing people to sell products in the way they sell cars or phones?
Historically, the answer was that many financial products were ingeniously constructed rip-offs and handed too much of the consumer’s money to the salesman. The answer to that is kitemarks for products meeting minimum quality standards, awarded by an independent board - not the FSA but possibly the Consumer Protection and Markets Authority. Plus a ban on financial products with high potential for bad outcomes - precipice bonds, 100 per cent-plus mortgages.
In a consumer market that is working well, in each product category, you would expect to see four or five firms taking 80 per cent of sales. That is what produces the best outcome in every other field of goods and services. So why not use intelligent regulation to nudge the financial services market in that direction?
We take regulation and consumer protection for granted in almost all the other goods and services we buy. All electrical goods have to pass safety standards. So do mobile phones, gas cooker installations, and cars. Why not require financial products to pass simple safety standards - limited charges, plain English, no rash promises? Why does the current system regulate everything except products?
If you have quality control over products, there is much less need to control distribution or process. The policy aim should be to enable the banks to sell to specific customer needs with the least possible regulation.
Old-style IFAs will say I plan to hand the whole industry to the banks. Not so. I want to hand the banks - as sales-people, not advisers - 80 per cent of the customers because only the banks can handle them cost-effectively. I want IFAs, with exclusive use of the “gold standard’” independent label, to be real professionals, looking after the top 20 per cent of the people and prob-ably over 60 per cent of the money under a regulated advice process that people are happy to pay for because they know they are getting value.
Chris Gilchrist is director of Churchill Investments and editor of The IRS Report
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Readers' comments (27)
Peter Butcher | 19 Jul 2010 10:57 am
Yep.
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Nick Bamford | 19 Jul 2010 12:19 pm
An interesting view from Chris. Is the problem that we have been calling something advice when what we meant was it was called selling? So was the problem caused by a regulatory label?
I can see how the banks are well placed to do the selling but let us hope that the products they are allowed to market are a) suitable, b) competitive and this is the real challenge c)sold to the right people, because to date this has not happend.
But Chris doesn't comment on the role that the internet might have to play in all this. If financial products become a product to be sold without advice why not use the internet to do that more effectively than the banks could ever do?
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Alan Lakey | 19 Jul 2010 1:30 pm
I was agreeing with most of what Chris says until I reached the cruncher - only the banks can deliver products to the 85% he estimates as not requiring 'advice'.
Given the banks inability to do other than offer shoddy advice with a propensity to prey on the elderly I find the prospect unsavoury.
Is it beyond the competence of the industry (FSA permitting) to devise products that are sensible and problem-solving with the added ingredient of a worthwhile marketing allowance?
If we commoditise everything then it becomes price-sensitive and most of the insurers and investment houses will disappear.
Is this what we want? It is certainly not what I want.
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David Carter | 19 Jul 2010 1:37 pm
I could not disagree more with this approach, which would open up the prospect of mis-buying on a vast scale. Yes indeed it would work well if everyone purchasing financial products knew about and considered the alternatives, but they don't. I have rarely met a client who has been able to work their way competently through even the list of 'basic' products that Chris mentioned.
There is, too, the peace of mind issue. The client who has used the services of an IFA can be (or, at least, should be) comfortable in the knowledge that, of all the potential options, the most appropriate one (of good quality) has been selected. And, if the adviser has got it wrong, there is (as I have said to my clients) legal and compensatory redress.
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You must be joking | 19 Jul 2010 1:46 pm
Hmm.. it seems to me I'm the first to totally disagree with what I feel is a poorly thought out article!
Surprised at Nick and Alan here.
So long term savings: Pension or ISA - great, fantastic planning, but what next. Each of these is merely a tax wrapper and whilst undoubtedly ideal for long term savings, the monies contributed still need to be invested!
So that leaves the non-advised client with some, rather important choices:
Attitude to investment risk/volatility
Every changing state of the economy
How to approach the investment, so they use
Managed Funds, Multi-Manager, Asser allocation, Passive, Active, ETFs
How often do they rebalance
When do they seek protection etc etc etc
I haven't 'done' a chinese proverb for a while, but what about this one...
It's not the first step on a journey that leads to the destinatlon but the steps taken along the way.
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BW | 19 Jul 2010 1:49 pm
What arrogant and complete nonsense.
I have had a RDR-proof business model operating since before RDR was thought of, since 2004. What is more it is not only fee based but also service based paid for from fees, I have not taken on a client on a 'commission only' basis since July 2004. All clients pay a fee, cheque and/or retainer based on their service level.
Guess what? I have teachers, plumbers, electricians, insurance clerks paying fees alongside company directors and relatively wealthy retirees. I have very few high net worth clients (whatever that means) and there is no cross-subsidy as my time is covered by the retainers.
They all pay fees based on the service level that suits them most, with the specific advice tailored to match.
So I speak from a market perspective different to most IFAs.
I can state categorically that such clients do appreciate and can benefit from professional fee based independent advice. They do not need to fall into the dubious hands of tied agents and banks to get their relatively limited resources screwed up.
Those who say not simply do not know what they are talking about, including Mr Gilchrist.
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Anonymous | 19 Jul 2010 1:53 pm
I suggest Chris Gilchrist comes out to discuss Life and Critical Illness with me, where advice is always needed
For example the banks will sell Life and Critical Ilness to cover a mortgage with a decreasing term plan to "match the mortgage", not explaining that it will be difficult to use for the second and third mortgage that it might be needed for, so the Bank gets lots of commission, but the client gets ever more expensive cover in the future. Also if they become less insurable as they get older,all they have is decreasing cover when they most need it.
The Banks would never talk to a client to suggest that the parents set up long term cover plans for their 18+ children.
My clients experience of Bank advice is woeful, with free (!) Wills, high risk investments to cautious clients, structured investment products sold within thirty minutes, when the client went in wanting just a deposit account and specifically did not want any investment risk at all, widows being telephoned every day even before the husband has been buried to do a very high risk investment without any proper Fact Find, another case where the Bank arranged a two year fixed rate joint mortgage over the telephone with the wife, with no signatures despite the fact that the mortgage was due to be repaid by an endowment in just over a years time and there would be a huge penalty to pay to clear the mortgage, etc, etc.
In the case of the structured product, which took an hour by me to explain to the client, the client went back and the Bank they immediately handed back the cash, with no questions asked and no paper trail of the mis-sale.
I have posted this anonymously, but Money Marketing have my e-mail address etc if Chris wishes to contact me.
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Bob Perry | 19 Jul 2010 1:55 pm
I agree with the statement that perhaps only 15% of the public have complex fiancial needs. However I regularly meet clinets who have been sold inappropriate products to meet "simple needs" i.e the single female in her mid 30s who has over £750,000 of life cover (including DIS), with none of the term assurances written under trust. She then is diagnosed with a terminal illness, by which time it is too late to write the policicies in Trust for IHT purposes. The married couple who were sold structured products by their Barclays salesman in a new red porsche. These products have just matured and they have received no growth.
RDR does not remove the need of advice for people with relatively simple needs. It does however price many of them out of the market. Hence RDR fails one of the FSA's own yardsticks - does it produce a positve outcome for clients. For many people RDR will not produce a posiitve outcome - it disenfranchises them from getting quality, professional advice and puts them at the mercy of target driven bank salesforces.
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Philip Meadowcroft | 19 Jul 2010 1:55 pm
So Mr Gilchrist wants financial products to be sold like cars and mobiles......
In one sentence he has destroyed the credibility of his article.
Has he tried buying either product recently ?
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John Blackmore | 19 Jul 2010 1:58 pm
Agree completely with the article but am not going to hold my breath.
Too many advisers have vested interests in trying to make the simple complicated and will happily go along with daft FSA regulations .
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