As lenders face the threat of digital disruption, returning to the advice market could be a way to find new revenue streams
The financial services sector is on the hunt for innovation, growth and redevelopment a decade on from the global economic crisis. In the UK, the lasting effects on banks of 2008 through to the aftermath of the RDR’s introduction in 2012 are widespread.
Most UK banks pulled out of providing financial advice or continued to dip in and out of the market with the promise of fresh offerings.
With regulation continuing to make the provision of advice both risky and costly, all banks are on the same mission: to provide a form of it that keeps prices down but remains suitable.
In Australia, the risk taken by banks to remain as the country’s dominant providers of financial advice after the 2012 implementation of the nation’s own RDR came at a heavy cost. The Future of Financial Advice reforms did smooth some of the sharper edges of the industry, but failed to stop the deluge of malpractice that led to the recent Royal Commission investigations.
The “big four” Australian banks – National Australia Bank, Westpac, Commonwealth Bank and ANZ – have all now exited the advice market. Customer remediation costs have swelled to AUS$1.1bn (£601m) for NAB alone, and advisers from two of the four lenders have been handed jail sentences.
It has been a decade of disruption and regulatory change globally for advice, but where now for the UK and the bancassurance model? Money Marketing approached Britain’s largest banks to see who is making plans to return to advice, and whether things will be different this time around.
Projects in the works
Nationwide began tests for its automated advice proposition in late 2016 after entering the FCA’s robo-advice development unit. The service was then described as “guided advice” through which customers would use an automated process to receive bespoke recommendations and face-to-face advice on a needs basis.
The investment threshold for full advice is £50,000, powered by the Cofunds platform. Today, the bank’s ongoing advice offering includes face-to-face reviews, depending on the customer’s level of service.
Nationwide says it is its advisers’ responsibility to contact clients and that the service will mostly be over the telephone. Ongoing services are charged as a percentage of the value of the investment portfolio, including any lump sums invested directly through Cofunds or former joint venture partners Legal & General.
HSBC axed its tied advice service in the lead-up to the RDR, but returned soon after with the roll-out of a simplified offering and has remained active in advice since.
It confirmed a “new personalised online advice service to make wealth management advice available at a fraction of the cost to those with a small amount to invest” in June 2017.
A robo service, MyInvestment, launched in December.
An HSBC spokeswoman says the bank is still focused on making wealth management advice more accessible.
She says: “Our online advice service, My Investment, complements our existing wealth management telephone and face-to-face support, giving customers the ability to invest the way they want, when they want, and get the best possible advice for their personal needs.”
Barclays has also kept a low profile, with the latest talks on its robo-advice rollout drying up a year ago. The bank did launch its self-directed investment platform, Smart Investor, but is yet to announce a hybrid advice offering that Money Marketing was informed of last April.
Financial planner, Serenity Financial Planning
It’s easy to try to predict what other people will do. But my view is the same as it’s always been: all I can do is the absolute best job I can, so enough clients experience that, and when they go to a bank or someone else that can’t do as good a job, they know what to expect.
Providing role models, showing people how it should be done, is the only way we are going to deal with these other models that just don’t work.
We are already seeing a change, particularly among the younger generation; it has already filtered through.
But the banks will have a strong hold, and ties with families and older people, which might not change.
After a difficult few years, February results for Royal Bank of Scotland revealed the bank has £206m set aside to cover the costs of FCA investigations into its historic provision of investment advice.
The occurrences, both pre- and post-RDR, were discovered as part of the regulator’s wider 2013 probe into advice offerings in banks, which was followed by a report on a number of failings.
Indeed, the continual reputational damage that has stemmed from a number of incidents at RBS since 2008 has led as far as consideration of a rebrand and name change.
The bank has kept quiet on its current advice services and also chose not to respond to Money Marketing when approached for comment for this piece. Face-to-face investment advice is available for high-net-worth customers with a minimum of £250,000 or more in deposit-based capital. The investor must also hold at least £360,000 in capital overall.
RBS’s private banking customers are also able to purchase protection through the bank’s face-to-face advisers but must hold assets over £1m, which cannot include the value of a main residence of property or capital within pension funds.
The focus on the high-net-worth market has been echoed by a number of major banks as they slowly re-enter the advice sector. A new tie-up between Lloyds and Schroders will create one of the largest players in the advice game, with claims that upwards of 700 advisers will be hired. Lloyds has not yet confirmed the mass recruitment drive, but will focus on a mass affluent offering as part of the deal.
CWC Research senior partner Clive Waller says: “Lloyds and Schroders understand planning, they understand investment, and that’s really exciting. The other banks have got to get into the market and probably all have some sort of robo or hybrid initiative lined up.
“Banks are needed for the mass affluent downwards, now that regulation has priced most people out of financial advice. Hopefully banks will come back in, although I don’t think they will have what we would term ‘proper’ financial advisers, because whatever banks do, they somehow manage to do it in a slightly dodgy way.”
A banking mindset
Future Life Wealth Management founder Jillian Thomas agrees banks need to be careful that their transactional mindset does not translate into an unsuitable advice model.
She says: “Since 2008, I think banks and advisers have been equally disliked by the public, and now it comes down to structure in advice. My greatest concern about bancassurers and building societies is that money gets deposited in an account, people get referred to an adviser, and transactions are done without anyone looking at overarching plans.
“If an advice process is going to be looking at the client across all aspects and a transaction is then done, I have no problem with banks giving advice. Otherwise, I do have a potential issue with it, because advisers have to always rewind and check with clients.
“What we are trying to do in the industry is take the level of advice up and get better outcomes.
“It’s not just about money going in and highlighting that the transaction has been undertaken.”
Newgate Communications partner Paul Wynne says a similar pattern of thinking was the catalyst for the problems seen in the Australian advice market.
He says: “The origins of the Australian Royal Commission go back a decade following a string of scandals associated with the banks’ vertically integrated wealth management and insurance arms, which revealed a toxic culture of dishonest and unethical practices.
“In the relentless pursuit of growth, banks expanded their traditional pure banking models to incorporate wealth management and insurance offerings but without adopting the necessary focus on managing non-financial risks, particularly corporate governance and reputation risk.”
Santander was the first major bank to signal a re-entry into investment advice and built up its integrated business model back in 2016.
The bank’s digital investment adviser service will set you back just £20 for a suitability report “containing” advice.
Zero Support managing partner Phil Young says Santander has built a reputation in the advice space thanks to keeping its plans in the spotlight.
The bank offers an investment advice service to customers looking to invest £20,000 or more for a minimum period of five years.
Young says: “Santander has a variety of robo solutions and other advice services it is developing, all of which have been very public.
“All banks go through an endless five- or 10-year cycle of coming into advice and going out again, but Santander has always had some level of communication on its intentions.”
When you are employing that many advisers, how do you control their standards? I can’t see banks competing with financial planners in that regard. People want quality advice; they aren’t talking about products now, so they aren’t going to be off to the banks for it. If it works, good luck to them, but it won’t be on a massive scale.
You do get the training, and if you are starting out, you can see it being a route in. But people realise when they get more experience that it’s all about planning and not products, and they move away from that model, so I don’t see advisers staying there long-term.
Banks are more interested in sales than relationship work, so people will want to move into a more personalised firm that gives ongoing service.
The first UK bank to launch a fully automated investment advice service was NatWest under the RBS Group.
Young says: “RBS surprisingly had quite an aggressive stance on not wanting to be at all involved in advice when it got into it, and it’s not that long since it did lay off all the advice teams.
“It had tried a joint venture with Standard Life in the past, but it hadn’t quite worked. I would expect all major banks to debut some sort of advice solution, but whether it’s full-blooded planning remains to be seen at this stage.”
Wynne adds that any aggressive cross-selling of products by banks will be spotted quickly.
He says: “In the UK, and as part of the European Union, we have been through our own journey of crises, remediation and oversight, and we should also keep our eye on other countries and further lessons to be learned. Banks continue to advocate to avoid legislating a forceful separation in banks between wealth management and investment banking, thereby leaving the door ajar for a return to the much-maligned vertical integration model.”
Slow push from the US
Major American institutions are nipping at the heels of British wealth managers as well. New York-headquartered Goldman Sachs moved into retail finance in the UK last August with the launch of a new savings bank. It then joined the bidding for a £109bn investment management contract put up for tender by Lloyds.
In January, Nutmeg – in which Schroders has a significant stake – secured £45m from Goldman in its latest funding round, which it is planning to use to take its offerings international in 2019. Among Nutmeg’s offerings is its controversial £350 flat-fee advice service launched last year, which has seen an uninspiring response so far.
Despite this, Young says the activity from American firms has cooled to lukewarm at best: “Because of the strength of the dollar over the pound, I did think we would see more US businesses come over and snap up firms in the UK.
“It makes sense for the larger American financial institutions to look to our market.”
Fellow New York finance giant JP Morgan looked to be making moves when it began its private banking venture in the UK last year.
Reports that the firm is looking to slash wealth management staff across the globe in a bid to focus on in-house fund management are continuing to draw attention, however.
Hargreaves Lansdown and The Share Centre struck a deal with JP Morgan to acquire 53,000 asset management clients and £1.5bn in assets earlier this month as part of what appears to be a larger wind-down of its direct-to-consumer offerings.
Thomas says: “We are a dying industry and we need to get new advisers in, and if the banks allow training people to support the industry in the long term, then we have to regrettably embrace it.
“If all advisers are being targeted on are money and transactions rather than specific overall advice in respect of the client getting the best outcome, we go back to where we were before.”
She concludes: “If you thematically look through every aspect of their financial life and planning, however, there is no problem with banks there in the advice space.”
Banks will help our sector
Some financial advisers welcome the return of the banks to financial advice. One recently told me “The banks can help people until they have enough money and really need advice.” Others await failure. Banks are seen as prone to miselling and shoehorning. Such cynics!
Lloyds and Schroders have teamed up and have plans to aggressively expand their number of financial advisers and assets under management. Lloyds is not alone – many banks and building societies are getting back into the game of giving advice. This is good news for the industry. Banks can help our sector through recruitment, access and coverage.
There are just shy of 26,000 advisers in the UK. If they each can deal with 150 clients, that means they can help just shy of 4 million people. According to ONS data there were 50.5 million adults (aged over 20) in the UK in 2017 and 33 million over 40. NextWealth analysis using ONS data suggests that there are 11.5 million people with over £50k net financial wealth and 7 million people with over £100k. That leaves a lot of people with investable assets who are unable to get financial advice and banks can help with coverage. Most financial advisers don’t have a set minimum but we all know that it can be tough to offer advice profitably to clients with smaller account balances. Banks can help offer a simplified solution to people with simpler needs.
Many point to Australia’s Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry as a threat to vertically integrated businesses and banks in particular. Many executives at large vertically integrated businesses were worried before the publication of the Investment Platform Market Study final report. The Terms of Reference and Interim Report suggested the regulator would closely scrutinise conflicts of interest. But the regulator concluded only that vertically integrated firms need to manage their conflicts of interest. There are no further remedies being proposed at this time.
This gives a pass to vertically integrated business models – provided they manage conflicts of interest
Heather Hopkins is managing director at NextWealth