The simplified advice debate
Rare opportunity to offer customers what they want
We should start to see more people saving in 2012 as they get a better understanding of how they can improve their finances.
Automatic enrolment will mean millions more workers paying into a pension and the RDR will be the biggest change in how investment policies are sold for a generation.
The RDR should result in more people making informed, sensible choices about the financial products they buy. But we are in danger of fewer people having access to advice, when the purpose of this reform was the opposite.
Insurers have strongly supported the RDR in the belief it will increase consumer confidence in financial services through changes to the way in which financial advice is paid for and by making sure more people are able to make informed decisions about what they want and need.
Increasing trust is crucial if we are to have a more financially resilient society.
The RDR will see a number of very important changes introduced on December 31, 2012. One such change will be a ban on product providers paying commission to financial advisers for recommending a product. Consumers will be required to pay for advice directly as a fee or as a deduction from any investment they make. Consumers can then be sure any recommendation an adviser makes is based solely on the client’s interest, not the level of commission. This is a crucial way of improving trust and transparency in the market.
Although we support what the RDR is trying to achieve, we have long been concerned there is a risk that one of the original and vital aims of the reforms - to enable more consumers to have their needs and wants addressed - is in danger of not being achieved. Far from increasing customer access to advice, there is a danger that fewer consumers will be able to access financial advice as a result of the RDR unless the FSA acts now and gives the industry the clarity and detail it needs to deliver a solution to this problem.
It is only right that people who want access to full financial advice should pay for that service and, in doing so, they should know exactly what they are paying for. But we know the majority of people who want to access this kind of advice are those who have already built up valuable financial assets and have a good understanding of the choices on offer to them. What we need to urgently address is how people who cannot afford full financial advice, or do not want to pay for it, access a service which can help them save for their future and ensure their families are protected if the worst happens.
In March, the ABI commissioned research of over 2,500 people, who were asked about their attitudes to financial advice. Over half told us they would not be willing to pay for advice and a third thought advice would be worth less than £300. With existing full financial advice services typically costing £;670 and likely to become more expensive as a result of RDR reforms, it is important we do not price people out of seeking financial advice or respond positively to a strong message about what our customers need from us. To get the RDR right, we need to convince sceptical customers that full advice is worth paying for and make simplified advice services available for those people who cannot afford full financial advice.
The good news is the ABI, along with the insurance industry, has already developed proposals for simplified advice, which we are ready to push the button on. The bad news is we cannot take this forward and make these services available to customers until we have had clarity from the FSA about the detail. We were very encouraged that FSA chief executive Hector Sants said there will be guidance for the financial services industry on simplified advice - this is a great step forward but we have no time to waste.
This is one of those all too rare opportunities when, instead of starting with whether the regulations and rules allow the industry to offer something to our customers, we are starting with what our customers are telling us they want and are looking at how we can to provide it. We hope the FSA and other regulators will help us to deliver on this.
We have a unique opportunity with the RDR to fundamentally change the way customers view and access financial products. These changes are at the sharp end where our customers actually come into contact with our products and make decisions whether to buy them. If we cannot deliver what they need to make good choices, all the other rules and regulations to improve products and customer satisfaction will be undermined as our customers will not be there.
Maggie Craig is director of consumer strategy at the Association of British Insurers
Potential to reach out to the public
It is essential the UK’s economy is supported by greater savings and investments and we believe a simplified advice model can help. The savings ratio is vital to long-term overall economic health of a nation. Growth and increased productivity are made possible only through sufficient levels of investment, which must be financed through savings.
Historically, the savings ratio has varied widely. It rose through the 1960s and 1970s against a backdrop of rising interest rates, reaching double digits for the first time in 1979 and peaking at 12.3 per cent in 1980. It declined rapidly during the 2000s, fuelled by rising levels of consumer spending and borrowing. Lower interest rates and greater economic stability before mid-2007 also reduced the perceived need for households to hold precautionary savings.
Encouragement of greater savings and investment, and giving consumers easier access to advice, were the original objectives of the FSA’s retail distribution review. These aims remain important public policy objectives. But the RDR will be costly for the industry to implement and is therefore likely to lead to a reduction in the overall supply of investment advice to consumers.
We could see a shift in advice provision towards wealthier clients, which would mean that the RDR results in a significant section of mass market customers being excluded from financial advice - unless new mass market propositions emerge.
We think simplified advice has the potential to fill the advice gap created by the RDR. It could fill the advisory gap that contains less affluent customers and it could also encourage savings. We believe it has potential to reach out to consumers and deliver savings, investment and protection solutions which are cost-effective and fair.
Simplified advice would still provide regulated help to customers. The advisory firm must be able to stand behind the advice it gives and, whether the advice is given face-to-face, online or over the phone, must be able to answer “yes” if a customer asks whether a specific product is right for them.
Simplified advice would provide single product recommendations in specific need areas and is designed as a solution for consumers with straightforward needs who want professional and affordable advice on savings, investment and protection.
Simplified advice is aimed at three types of customers. First, those with no - or little - straightforward savings, investment or protection provision. These customers, though, will need to have the financial means to allocate funds to address this shortfall. Second, customers with existing but sub-optimal straightforward savings, investment or protection provision. Third, customers who have identified a specific need relating to straight- forward savings, investment or protection provision and want focused advice to address this need.
Simplified advice would generate personal recommendations based on a limited assessment of the customer’s financial circumstances. It would provide a streamlined, simple and efficient advice process that is affordable for customers. It would give customers the reassurance of getting advice within a regulated framework and products would be carefully selected from a specific “product set” by the bank to match the customer’s needs.
The BBA and Accenture have together looked at simplified advice as a new model for financial advice and believe it could serve up to 30 million potential customers - providing access to advice for the vast majority of the UK working population.
It could serve customers who want to save small amounts of regular contributions, as well as providing cost effective and focused investment advice for those eight million customers with existing cash savings between £5,000 and £50,000.
Simplified advice could offer convenience, too, taking under an hour to complete the process - during a lunch break, for instance - and could be accessible by internet, face-to-face, or by phone.
That is why we are continuing to press the case for simplified advice to consumers, policymakers and regulators. I wrote recently to Hector Sants of the FSA to press our case, and understand a paper is due before the summer from the regulators on how such a system might work for them.
We believe this system will work for the regulators, the Government, the economy and, crucially, for up to 30 million consumers. We are keen to work with the authorities to support the introduction of this new service.
Angela Knight is chair of the British Bankers’ Association
There is no ’advice-lite’ definition
Simplified advice is increasingly pitched as a solution to the access to advice concerns of the industry. The RDR sought in part to address the same point with its original consumer access objective, although this has clearly fallen off - or been removed from - the agenda.
However, I believe it is disingenuous to claim that the RDR will create a savings and protection gap - the gap has been widening for many years.
The RDR is likely to exacerbate this, which makes it vital we address the issue. But it is wrong to use the RDR as the singular catalyst or to insist that simplified advice is an integral part of the RDR proposals. Railroading through solutions in the latter days of the RDR will not serve consumers well.
Many people have talked about “simplified advice”. This is a misnomer - there is no such thing as simplified advice, there is no regulatory regime or glossary definition. Advice is defined for each product set - for investments, protection or mortgages. There is no “advice-lite” definition.
Some IFAs may see elements of proposed simplified advice models as a threat and potentially they could be. The reality is that many IFA clients are C1, C2 in old money, Aifa research showed that some 40 per cent of existing IFA clients are in this area.
This does not surprise me - the value added by independent impartial advice is clear to see.
The economic viability of the 20-something debt-constrained may be difficult to see in 2013 but someone of limited means approaching decumulation should and could be an economically viable part of the market for IFAs after the RDR.
However, we should be honest that there is a portion of the population who cannot be served by IFAs in a traditional model. In that respect, this allows Aifa to offer an unbiased view on what is in consumers’ best interests - and thus to dispel a number of myths.
Before diving into a discussion about remuneration and qualifications, I think it is worth first considering the products considered in scope by some participants, and how they are regulated - cash Isas are regulated under banking regulation, equity Isas under Mifid-inspired rules and pure protection and some pensions products and annuities under IMD rules. These three different approaches, even when dealt with in part under UK hybrid Cobs and Icobs rules, do not ease a one-size-fits-all regime, let alone work at a European level.
Given such a potentially wide product set, I therefore question the approach of anyone saying level three qualifications and commission as the basis for a simplified advice regime. After 2012, as today, protection products can be sold without a benchmark qualification, and with commission. Icobs does not even have mandatory commission disclosure. So, in effect, what those people are actually calling for is the status quo for the investment market under a guise of increased consumer access. And I thought the industry and regulator had broadly agreed that investment products fell in the scope of the RDR for a reason?
It is superficially attractive to hide behind IT implications of a possible simplified advice regime as a reason to minimise qualifications.
What qualification level does a decision tree have to operate under? Arguably, because of the mass detriment that could be achieved by a single decision-tree designer, level eight and a new significant influence function may be most appropriate. I also remain confused by the argument that a rule change is necessary for decision-tree processes to work after 2012.
After the RDR, one possible IFA business model would be an unqualified “client relationship manage”, working with a paper fact-find and a highly qualified paraplanner giving regulated advice, How does that differ from an unqualified facilitator, an IT decision tree, with the final advice backed up a highly qualified decision-tree designer
It looks like a very similar model - and one that does not necessitate a change to the rules. Yes, it might be more profitable or easier to work at a lower level but wouldn’t that be true for everyone offering investment advice?
From a consumer perspective, should I have less protection if I buy my regular- premium pension or Isa through simplified advice, or through full financial advice?
I am not saying that there is not scope and need for discussion over access to advice and it is important that any solutions are available to all sectors of the market. But these are complex issues, spanning the Treasury’s simple products work, the RDR, and product intervention from FSA/FCA. This should not be an excuse to try to carve out a section of RDR products and achieve the status quo under a banner of “access to all”.
Andrew Strange is policy director at Aifa
The middle ground needs servicing
Every adviser will have experienced the dilemma when they are down the pub and faced with with the typical question: “So you are an IFA; should I invest in one of those ISA things? or “Is now the right time to fix my mortgage?” The only response of course is: “It depends.”
It depends on individual circumstances and objectives - so it is never possible, or indeed ethical, to attempt to answer such questions with a straightforward yes or no. And this is exactly where the problem lays for the adviser in terms of the concept of simplified advice. Where exactly does it sit between non-advice and full regulated advice?
IFAs are very passionate and protective of their independence, to the extent that many perceive non-advice and simplified advice as diluting their status and an undermining of their credibility. If you had asked me as recently as a few years ago whether we would ever contemplate non-advice you would have been met with a string of expletives. Having spent 15 years as a tied adviser prior to becoming independent, my pride in proclaiming my independence was akin to that of an annoying evangelical ex-smoker.
However, once you immerse yourself in the world of social media you realise the speed at which information is demanded and exchanged by consumers, and financial services is no exception. However, this is not confined to social media, it is a reflection of the way we live our lives.
Almost all enquiries default via Google with the expectation of an instant answer or at least a narrowing of choice. Forget the differences in financial advice approaches between gener- ation X and generation Y. It is no longer a generational issue. It is a societal one. This is “Society Now”. So anyone who believes there is no demand for simplified financial planning solutions is deluding themselves in true King Canute style.
Consumers are finally learning not to trust their bank but crucially they are also no more likely to commit to a full financial review service from an IFA. Or not in the first instance, anyway. There is a middle ground that needs servicing and for these reasons we are actively exploring guided online solutions to complement our face-to-face full advice. Nonetheless, I still maintain that a process that is simplified, basic, restricted or whatever is inferior to holistic, regulated, accountable advice. However, this is not what all of the market wants all of the time.
Our interpretation of what constitutes simplified advice could best be described as “responsible non-advice”. However, the FSA must be clearer about the guidelines and restrictions on this concept if they want potential distributors of such solutions to embrace it.
Peter Chadborn is director of Plan Money