FCA data showing a spike in non-advised sales through advisers has raised concerns firms are dressing up advice as execution-only to get around suitability requirements.
The data shows the number of non-advised sales by financial advice firms more than doubled between 2012 and 2013, from 361,405 to 852,295.
The surge means that among advisers, execution-only sales have now overtaken advised sales, which reached 831,473 last year. The figure is up by 13 per cent from 733,124 in 2012.
The latest available data shows the trend is continuing. In Q1 there were 253,679 execution-only sales through advisers, up 148 per cent year-on-year, and 249,341 advised sales, up 41 per cent year-on-year.
While some experts say the rise is likely to be due at least in part to the introduction of automatic-enrolment, others warn advisers may be flouting suitability rules.
The increase was so concerning to the FCA it prompted a thematic review into simplified advice and non-advised services earlier this year.
In July the FCA published the findings of its thematic review, as well as a consultation paper which aimed to clarify the boundaries between advice, simplified advice and execution-only. The consultation closed last week.
The review included visits to 13 firms with a range of business models. It found that for non-advised services, most firms had identified the types of customer their service was suitable for and designed their model appropriately.
But the regulator found some firms were not meeting its expectations. The review says: “However, it was also clear that uncertainty regarding the application of the regulatory framework (or an overly cautious interpretation of how it applied) was leading some firms to exclude information and tools that were likely to help customer decision-making and reduce the risk of poor outcomes.”
An FCA spokesman says: “This summer we published a thematic review that looked into the sale of investments without advice or a personal recommendation.
“This work was partly prompted by growth in these sales, which resulted from a number of factors, not least auto-enrolment, technological change, and new business models developed in line with the implementation of RDR.
“We found that most firms had identified the types of customer their non-advised service was appropriate for and designed their model to try and support informed customer decision-making.
“As this sector is still evolving, we’re continuing to monitor developments to make sure consumers are getting the right outcomes.”
But independent compliance consultant Adam Samuel says he has seen evidence of advisers putting through what should be advised sales as non-advised in order to avoid the regulator’s suitability rules.
He says: “The increase in execution-only sales is a product of the usual descent to the bottom by some advisers concerned by the RDR who have not thought through their business models properly.
“Most of these sales will later be regarded as advised if complaints go to Financial Ombudsman Service. The ombudsman is very sceptical about advisers claiming sales are execution-only.”
Aviva has also raised concerns about firms dressing up advised sales as execution-only in its response to the FCA consultation.
The provider says in its response: “There is a wide range of approaches taken by firms offering non-advised services. As the FCA paper states, many firms have been risk averse in their approach.
“However, there are some instances where firms appear to be offering advised services whilst marketing these as non-advised. We would be grateful for confirmation of what supervision activity the FCA will conduct to ensure its guidance is followed.”
The FCA reports the split between advised and non-advised sales by both product and firm type.
The data shows a huge increase in non-advised personal pension sales last year, with sales almost tripling from 543,996 in 2012 to 1.5 million. Group personal pensions, personal pensions, Sipps and stakeholder pensions are included in this.
The figures also show that non-advised occupational pensions sales rose from 165,040 in 2012 to 312,590 in 2013. Auto-enrolment was introduced in October 2012.
EY financial services senior adviser Malcolm Kerr says: “Probably there are some instances where advisers are putting sales through as non-advised to save the hassle of all the hoops you have to jump through for advised sales, plus the fact they can earn commission on non-advised sales.
“But looking at the product data, there is a big leap in occupational and group pension schemes, so the spike in execution-only sales through advisers is likely to be down to auto-enrolment.”
Independent regulatory consultant Richard Hobbs agrees.
He says: “The data shows a material decline in advised sales compared to non-advised, both by product and firm type.
“Personal pension non-advised sales went through the roof in 2013, which can only be because of auto-enrolment, and is the most probable explanation for the rise in execution-only sales through advisers.”
Another possible explanation is advisers developing execution-only arms for clients they can no longer serve profitably on an advised basis post- RDR.
But experts say that is unlikely given most firms have been unable to develop non-advised businesses successfully, and instead refer low-transaction clients to D2C providers.
The Phil Billingham Partnership director Phil Billingham says: “I have seen a reduction in the use of non-advised mechanisms by advisers. The RDR has made advisers work to justify charging a fee, and where they cannot do so they will send them to Hargreaves Lansdown.”
Plan Money director Peter Chadborn launched a non-advised proposition, Plan Direct, in January 2013. The offering refers clients to comparison website PayingTooMuch.com for protection products and is aimed at ensuring the firm does not have to turn away low-value clients.
He says: “The data implies that more firms in the post-RDR world are using non-advised models. But what we hear is that firms are struggling to make that work.
“Our non-advised arm was only designed to transact a small amount of business, and we do hope to expand it to investments in the future, but we have not yet had time to put more energy into the offering.
“So if we are hearing lots of firms saying they are either not doing non-advised, or like us have created the facility but are not doing a great deal of business, the figures appear to point to inappropriate sales.”
Chadborn says Plan Money is having much more success with focused advice sales, where advice is given on only one aspect of a client’s portfolio, which he says allows the firm to deliver advice more efficiently.
Hobbs says the figures support the anecdotal evidence he is seeing that growing numbers of consumers are using non-advised channels to invest in stocks and shares Isas.
The data shows that the number of non-advised Isa sales rose by 25 per cent between 2012 and 2013, from 96,720 to 120,710. Advised sales, meanwhile, fell by 27 per cent to 143,551 in 2013.
Non-advised sales through investment management firms, meanwhile, almost doubled from 133,532 in 2012 to 264,017 in 2013.
Hobbs says: “Following the Isa changes announced in the Budget, a lot of people are self-investing in Isas. These are typical adviser clients with a decent amount of money to invest, but they are finding they can do it themselves.
“I would expect the number of non-advised sales through investment managers to double again in 2014 or even treble.”
Billingham says aspects of the data are concerning.
There was a 65 per cent rise in non-advised bond sales in 2013, from 14,123 to 23,361. Advised bond sales, however, fell by 57 per cent to 47,657.
Billingham says: “I suspect there was some fiddling of the numbers by advisers on bonds, particularly for top ups, as the RDR came in.
“I would also be greatly worried if there had been an increase in non-advised Sipp sales. I struggle to see how it could be right for a client to invest in a Sipp on a non-advised basis.”
The FCA does not provide separate numbers on the split between advised and non-advised sales for Sipps as it is included within personal pensions. However, the data does show the number of Sipp sales almost tripled between 2012 and 2013, from 264,703 to 718,561.
And responses to the FCA’s non-advised and simplified advice consultation suggest the boundaries between advised and non-advised services remain anything but clear to firms.
Responses from Zurich, the Personal Finance Society, Apfa and Aviva all say further clarification is needed.
Apfa says the guidance is at times ambiguous and contradictory, and that firms “would like to see more clear-cut examples accompanied with a rationale” as to whether activities are classed as advised or non-advised.
While auto-enrolment may explain away the figures in part, the data points to the worrying consequences of the continued uncertainty over the line between advice and non-advice.
Expert view: Data reveals decumulation gap
Firstly, a word on where the statistics come from and how reliable they are. Product providers supply the data and it is gathered from a tick box on an application form, ie. ‘Did you receive advice?’ That is pretty reliable, but it does not give us much of an insight as to the business models sat behind it, so some of this is speculation. Most significantly, it does not tell us what money comes from new cash and how much is money recycled out of one product and into another.
Inevitably, non-advised personal pension sales shot up in 2013 as auto-enrolment began, but how much of this was also the result of ‘pension consolidation’ activity? A number of providers now aggressively chase down small pots, activity which is typically below the radar and outside average adviser case sizes. Growth in advised personal pensions (which includes Sipps) is steady but pretty modest in comparison.
Decumulation tells a more interesting story. Drawdown and annuities are lumped together but in 2013 annuity volumes outnumbered drawdown business by five to one, so it is reasonable to assume that the dramatic drop off in advised decumulation business levels in 2013 is linked to the commission ban.
What is more surprising is the lack of real growth in non-advised decumulation business between 2009 and 2013. Non-advised annuity brokers certainly did not plug the gap left behind by dwindling advised sales in 2013, so had their impact been overplayed before the Budget wiped many of them out?
The inevitable drop off in non-advised sales in this area in 2014 has combined with a gentler, long-term downward trend in advice volumes, suggesting this, rather than accumulation, is where the ‘gap’ is. Given the relative success of auto-enrolment to date and likely cap on pensions charges, the complexity and risks of withdrawing money from more flexible pensions, and the wall of baby boomer money approaching retirement, it seems right that decumulation is where much of the attention should be focused now. It is the biggest area where advised and non-advised business is in clear decline and there are limited alternative products to plug the gap.
Phil Young is managing director at Threesixty
Jason Witcombe, director, Evolve Financial Planning
From a consumer’s perspective, if you go to see an adviser and come out of the process with a product, you would assume you have had advice even if from a regulatory perspective you have not. When advice firms operate a non-advised channel, there is a big danger that the line between advised and non-advised gets blurred.
Luke Fernquest, independent financial adviser, Fernquest Financial Planning
From the companies I have worked for in the past, it tends to be the smaller cases that can get put through as non-advised to cut down on administration costs. But this is a grey area and there is often a question over whether they should really be advised sales.