The provision of advice used to be a business. It involved selling products to clients. Almost all advisers and bank-owned wealth managers used this business model in the 1980s and 1990s.
The RDR in 2013 mandated a switch to a model where advisers received ongoing revenues from clients, and they have slowly moved to providing differentiated services ever since.
Provision of advice as an ongoing service fits naturally into a professional, rather than a commercial business model. The original RDR blueprint included an industry-led professional standards board to set ethical and business standards. That was dropped in favour of the current process-based (aka tick-box) style, where principles play second fiddle to the millions of words in FCA manuals.
The consolidators hoovering up the businesses of retiring IFAs have a commercial model in which “build for sale” and “build for assets under management fees” are the overriding objectives. The regulator has connived in the design of a sales-led process masquerading as advice, and a host of compliance consultants enable consolidators to pretend they are treating customers fairly when, in reality, they are selling solutions.
In theory, a commercial sales-driven model might not be a bad thing. The incentive to be efficient and cut costs can have beneficial results for clients. But I am sceptical as to whether this applies to the provision of advice in the UK, with its extraordinarily complex tax system and pension rules.
An adviser needs to know client circumstances as well as the rules in depth to give good advice. That also suggests a professional model is the right one. On the other hand, advice as a transactional service can and will be simplified and made highly efficient. Simplified services are likely to suit many people because they have neither significant financial assets nor complex needs.
But why can we not call a spade a spade and call this selling products? The FCA’s change to the definition of advice, which requires it to contain a personal recommendation, does not put the boundary line where it ought to be: between advisers offering ongoing services paid for by fees, and businesses profiting from product revenues. Instead, the definition change is intended to facilitate simplified product sales masquerading as guidance.
What, apart from a dogmatic attachment to an outdated model, stops the FCA from calling a sale a sale? In this case, it is EU directives defining advice that limit what the FCA can do. Ironically, those rules are based on lobbying by the FSA and the Treasury, which led to EU-wide rules based on the UK’s “superior” model of advice regulation.
So will Brexit permit the UK to tear up these market-constricting rules? Will the UK retail financial services industry be liberated from the dead hand of Brussels? Or will our ever-so-accountable Sir Humphrey find ingenious new reasons for preserving the status quo? Yes, minister.
Chris Gilchrist is director of Fiveways Financial Planning