Banks are cautiously lining up moves on the fully regulated advice market as IFAs prepare to meet a new challenger for their clients.
While high-street lenders have predominantly been focused on offering generic guidance-style services since rolling back their advice arms ahead of the RDR, some are now hoping that they can win new business through offering personalised, tailored recommendations to savers.
Some banks are still only offering a basic automated savings tool, or are in a holding pattern on further developments ahead of a new definition of advice coming into force in January that clarifies that this must relate to a personal recommendation.
Barclays, for example, quit advice in 2011. However, it is understood that the bank is planning a return through “hybrid advice”, combining face-to-face and online offerings. This is set to be a general financial planning service, not just for investments. Barclays does currently offer a wealth management service, but does not offer personal tax advice as part of this.
Lloyds pushed back its plans to launch a robo-adviser last year as it weighed up the landscape after the Financial Advice Market Review. But reports over the summer suggested it had placed wealth management higher up its strategic plan.
“Lloyds is in a unique position to offer financial planning, retirement and long-term savings solutions to retail customers,” the firm said.
Others are clearer that they see the future of their proposition wedded to fully regulated advice, and have already made steps in that direction.
Santander’s financial planning service is currently restricted to “selected” fund ranges, index-linked savings bonds and fixed term investments by the bank. Clients need at least £50,000 to invest. Meetings with advisers are free if the client doesn’t want to invest. Up front charges are 2.5 per cent up to £150,000. Ongoing charges are 2.5 per cent of monthly payments.
Santander is understood to be lining up a robo-adviser alongside this service this month, which will look at goal-based planning, where a financial planning manager will work with the client in branch with the online service to deliver fully regulated advice in another hybrid model. There will also be the option for a financial planning adviser to do a two-hour factfind with the client.
A Santander spokeswoman says: “Santander is developing an online advice solution that aims to make investing advice more accessible and more affordable to more people. We will update on our plans in due course.”
HSBC also offers restricted advice at the £50,000 threshold. It then announced a robo-adviser for clients with less than £15,000 earlier this year, which it said it planned to launch by the end of 2017 offering personalised recommendations based on algorithms.
It is understood that this service, which was built in-house, is now going live in January, pulling client data from customer accounts, with advice then taking up to 20 minutes once all the information is in. It will be restricted to HSBC customers at the start, but there are plans to widen the service to the wider market.
RBS joined the robo-party in November. It claims it can offer fully-regulated advice for £10 if clients choose to invest. Fund charges are capped at 0.6 per cent and lump sums have to be at least £500. However, just two weeks later, it announced it was also closing 259 branches, undoubtedly limiting its ability to offer face to face services.
Nationwide trialled an in-branch automated advice service last October after working with the FCA innovation unit. Again, the investment limit for full advice is £50,000, powered by the Cofunds platform, and UBS’ SmartWealth app launched earlier this year also gives personalised recommendations.
Tracey Evans, financial planner, Juno Wealth Management
I’ve seen it all before. I’ve been in the industry 30 years and the banks have come in, gone out, come in, and gone out again. Ideally, they will pick up the lower end of the market that IFAs don’t really want to be involved with. With the cost and complexity now it’s a difficult job to serve them and you can’t do it for nothing, so I do see the banks as having a place, but they’re still not our competition. A strong part of the market does want face-to-face financial advice, and banks have never done it well, that’s’ been the problem. If that bit isn’t making money or there is a big regulatory issue, they will drop it for a bit and just deal with core business.
Altus director Simon Bussy says: “We very much recognise a trend from execution only to advice. Certainly, the larger brands are very determined to provide advice.”
Altus is consulting on a number of bank projects currently, including Santander, HSBC and Nationwide.
Bussy says: “Often the argument was that they are giving discretionary investment advice, and that’s good enough. I would argue that’s different from financial advice, so with what banks are trying to do, they are in the right place.
“They all say they want to give advice to help rectify that advice gap that RDR inadvertently provided…The fact that they are standing behind personal advice is a big step forward.”
Tenet distribution director Helen Ball says: “Aided by robo-advice to drive down costs, the re-entrance of the banks serving the mass market will improve education and understanding.
Expert view: The age of the adviser is not dead
As we continue to see the effect of the advice gap, we welcome any moves to help investors access advice, including banking institutions who are looking to offer regulated automated advice. Data from the International Longevity Centre illustrates how important this is with findings such as the “just getting by but advised” group accumulating on average £14,036 (or 39 per cent) more in liquid financial assets than the equivalent non-advised group, and £25,859 (or 21 per cent) more in pension wealth.
However, new digital innovation related to advice obviously needs to be used in the appropriate circumstances and under strict suitability rules as new offerings can differ widely. The age of the adviser is not dead.
Pimfa’s (and formerly WMA) Millennial Forum research over two years has concluded that face-to- face advice is something wanted by millennials and that they would pay for when they get to critical stages of life. Further recent Compeer statistics show 43 per cent of clients believe that their relationship lies with their advisers and only 17 per cent of respondents in their survey claimed they were likely or very likely to change their wealth manager, adviser or stockbroker in the next 12 months.
Technology is certainly an enabler for both business efficiencies and for the advice process. It also extends their reach to new clients young and old. Again, recent Compeer statistics show 66 per cent of investors rated the digital offering of their main provider as either good or excellent.
Liz Field is chief executive at the Personal Investment Management
& Financial Advice Association
“With knowledge and visibility will come the desire to be more informed and engaged and consequently to seek advice but the challenge for advisers will be to demonstrate their value. Using the analogy of the DVD being hailed as the end of cinema and online travel sites making high- street travel agents redundant, both cinema and travel agents continue to thrive because their value is understood and each has its different part to play.”
The regulatory risks ahead
Big banking names were prominent among those that have successfully participated in the FCA’s Advice Unit to date, where the regulator offers guidance on authorisation applications and proposition development for new advice models.
HSBC, Lloyds Banking Group, National Westminster Bank, Nationwide Building Society and Santander were five of the 17 firms announced up to August this year.
Using automated advice to close the advice gap and drive down costs sits well with the FCA’s current competition push and value concerns.
But there remain “industrial scale” compliance risks that only apply to the banks once they start giving personalised advice, not more generalised guidance, which is not regulated in the same way.
Bussy notes that this has put many of the smaller challenger players off from straying into the fully regulated advice space.
While Nationwide has worked with organisations like Evalue and Wealth Wizards to develop advice algorithms, Bussy says it is clear that Nationwide will carry the responsibility for the advice.
However, there are concerns over how much understanding the clients will have of what they are being offered, and whether they will be at the centre of the banks’ advice.
For instance, Nationwide’s paperwork for those receiving personal advice through a Nationwide financial adviser details total charges, including fund and platform costs, which could add up to nearly 5 per cent in some cases. Initial advice charges are 2.5 per cent, with an ongoing service charge of 0.75 per cent. Fund charges are up to 0.42 per cent for the bank’s primary fund range, with 0.31 charged for servicing. Model portfolio fund charges are up to 1.15, with 0.39 per cent charged as standard platform servicing.
Moreover, the initial advice fee is charged on each increase or new regular investment based on contributions expected over the following 48 months. This structure has parallels with the St James’s Place model, where a 6 per cent exit charge, which decreases by one per cent each year, ticks back up to 6 per cent with each piece of new business. The initial advice fee is not refundable if the client does not make the expected contributions and will represent more than 2.5 per cent of the investment made if they don’t make them.
When moving out of funds where commission is payable into those where it is not, Nationwide will also ask clients to pay the ongoing service charge.
How much business the banks actually win from traditional IFAs remains to be seen. Service levels are key to running a fully regulated advice business. A number of advisers have reported winning clients because they were waiting too long to be seen by a bank branch adviser, of which some are covering more than one branch at a time.
ISJ Independent Financial Planning adviser Lena Patel was formerly an adviser at Barclays and Santander.
She says: “Ultimately I left because it was pretty rubbish. There was no inheritance tax planning, no proper pension planning. There’s lots of questions planners need to ask; can you retire early, what are you investing for? There was no cashflow modelling, and those are the questions the client doesn’t ask, and it was really different that I was asking those questions. It was more ‘this is what you can get for your portfolios’.
“Picking a fund is not the issue. Why are you investing? You can’t get that through a robo-adviser or someone looking over your shoulder. It’s a backward step for the industry which makes it look interested in money and bonus-driven.”
Patel expresses concerns that even as the advice banks are preparing becomes more complex, they may make it difficult to go off-panel to pick products or to flex the investment restrictions at the firm.
Because of these issues, many advisers say they do not believe the advice services offered by banks will be direct competitors for their businesses. Seventy per cent said that they did not see bank advice as a threat to IFAs in a poll on the Money Marketing website this week.
Bussy says: “The banks are still fully focused on the mass market, the mass affluent. IFAs tend to be more upmarket. There have been a number of adviser firms who have considered running a robo alongside their existing business, but they haven’t to date been overly successful. Advisers aren’t necessarily looking for those clients. They pick them up if they get them, but they are not going out of their way to find them.”
Bank advice: A timeline of misselling scandals
December 2011: HSBC estimates a £29m compensation bill after inappropriate advice to elderly customers.
February 2013: Mystery shopping by the Financial Services Authority finds 11 per cent of bank advice unsuitable
December 2013: Automatic demotion for failing to meet targets, uncapped bonuses and a “grand in your hand” competition branded “serious failings” as FCA fines Lloyds £28m over advice sales incentives
April 2014: Santander fined £12.4m for unsuitable investment advice
September 2014: Mortgage advice failings land RBS with £14.5m fine
October 2015: Santander sets aside a further £43m for investment advice compensation
May 2017: Barclays fined £75m by US authorities for overcharging for advice services and fund sales