View more on these topics

Chris Gilchrist: ‘Zero cost’ advice fast approaches

Few are in a position to compete with online offerings testing the boundaries of regulated advice

Chris-Gilchrist-MM-Peach-700.jpg

Paul Lewis recently claimed the right to go on giving free advice to his readers and listeners. As a former journalist I entirely agree with his viewpoint. Just because a regulator has chosen to define certain types of advice as regulated does not mean other people do not have the right to give unregulated advice using the same term “advice”.

Advisers that think the FCA’s current stance on regulated advice is definitive are living in la-la land. But the real reason why some forms of advice will become free is not that smart journalists as well as dumb folk at the Money Advice Service are giving people what they would call advice. It is that the cost of delivering generic advice will approach zero.

This is the internet model. Once the costs of establishing an automated online system have been sunk, the marginal cost of delivering that service is zero, so the price will also rapidly approach zero. This is why I do not consider the development of simplified decision-tree online advice services an attractive proposition for established firms of advisers – though it may be worthwhile for a cubicle of bespectacled coders backed by some silicon roundabout optimists.

If you have bought books and music online you will understand how marginal cost rushes towards zero. The same is true of any online service. Look at the software companies that used to collect big licence fees from users. Now they get no upfront payment and much smaller revenue streams as user fees – and every new version of the system costs less because some upstart rival has come up with an even slicker and cheaper way of delivering something similar.

Established adviser firms are in no position to compete with technology start-ups when it comes to delivering relatively simple generic advice online. So they would be wise not to try.

Returning to the “advice” issue, it is important to note advice is regulated only when it comes to recommending products. Effectively, it is still products that are regulated but for historic and political reasons regulators chose to regulate the advice attached. It was, in my opinion, the wrong decision and has cost consumers a fortune but “free market” is one of those sacred cows nobody has the courage to slaughter. Never mind that the FCA’s new rules on product launches effectively put companies (and their bosses) under the cosh if they promote the “wrong” products to certain types of people. As the FCA sees it, this is not product regulation but process regulation. “Walks like a duck, quacks like a duck” is my response.

The development of online generic advice services will test the boundary of regulated advice. Already there are plenty of small websites that break the rules and if Hargreaves Lansdown thought it could get away with it it would follow suit. Eventually, however, there will be so many websites breaking the rules that the FCA will have to put up or shut up. In fact I expect it to fold. Can it do so without formally acknowledging that products are now regulated? Not, I think, in the English language you and I understand.

Chris Gilchrist is director of Fiveways Financial Planning, a contributing editor to Taxbriefs and edits the IRS Report

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

There are 21 comments at the moment, we would love to hear your opinion too.

  1. My mate down at the pub said……

  2. I agree with you Chris, advice is there for free if one chooses to look for it. The internet is full of useful stuff; it’s just that many of my clients do not use or trust the internet and I suspect that many other advisers may experience the same.

    Before RDR came along, I held the view that the need for face to face advice, as we know it, would diminish over the next decade or so, as more internet-savvy people chose DIY or on-line advice. I wouldn’t expect my kids to be sitting down with an adviser in years to come, it will be a different market.

    However, for now, those who are 50+ (which I suspect may be a large component part of the face to face advisory market) will just continue with their ageing less internet-savvy clients and when all has reached its conclusion (retirement or the passing of the clients), the new era will have taken over (good luck with that!). This was why I always felt that RDR in terms of its objectives, was in many ways so flawed, as it saw the removal of many good (if slightly aged…no substitute for experience though!) advisers, ten years before the market was truly ready for this level of change.

  3. @Steve D – I once again agree with you.
    I have just turned 50 and I see myself working my way out of business with my existing clients and those just coming up to retirement. Those internet savvy could use the internet, BUT there is an awful lot of information on the internet and an adviser can try to see the wood for the trees.

  4. Perhaps generic advice will become free with time. But a lot of people don’t (and may never) want “generic”. How bland would the world be if everything was generic? People like bespoke. People like service. People like brands. Provide these and you might have some success.

  5. Oh yes the on-going cost of online business is zero. A slightly different model but even now ask how’s the largest internet retailer doing then? On net sales of $89bn, Amazon made a loss of $241m for 2014

  6. Ask doctors how successful their patients self diagnosis of their symptoms and required treatments are.

  7. If you call ‘advice’ selling a product then you and your business are clearly toast.

    I suspect that there will always be demand for investment management, tax advice (especially CGT and IHT) and assistance with pensions drawdown. These are issues that are complex and the costs of getting them wrong far outweigh the price of advice.

    Unless, of course the Government massively simplify the tax code!!

  8. I have recently met someone who had called his bank to ask whether he can transfer an ISA to his wife. The bank said no but failed to mention that on death the answer is effectively yes.

    He also asked the bank whether ISAs were liable to IHT – the answer given was yes but (again) the bank failed to mention that there are holdings now eligible for ISAs which could fall out of an estate for IHT purposes.

    He rang his bank for ‘advice’, got factually correct answers and has acted upon them and has therefore recently cashed in a significant amount of ISA holdings but it turns out that was perhaps not the ideal course of action…. though he did go on to say it wasn’t ‘formal advice’ he was seeking.

    He pointed out during our discussion that, if he’d spoken to me first and understood the full detail, he would still hold the ISAs and therein lies the difference between ‘advice’ and advice.

    He’s got no come back and whilst the information he was given was technically correct, IMHO it outlines the point that IFAs are paid to be take a clients situation and help then achieve their outcomes and the breadth of knowledge and experience built up in doing so is hard to quantify and the potential benefit to the client hard to establish.

    Irrespective of how it’s cut – personal, regulated, inpartial advice is totally different to ‘guidance’ or any other form of advice for that matter which is not specific to the recipient given that the former carries a liability whereas the provider of the latter can always hide behind the ‘it was generic’ label.

    The danger lies where a consumer makes a decsion thinking they are ghetting the former whereas they are infact carrying the can for their own decision (i.e. as is the case with the latter).

    All this guidance/advice debate does is muddy the already murky water of consumer protection, regulation, disclosure and what precisely a client is benefitting from.

  9. Whereas before you would have had to ask your mate in the pub, now you can ask 50 mates in 50 pubs at the click of a button.

    However, without regulation, qualifcation and recourse, they are all still just some guy in a pub.

  10. The ” Marketing Mix ” four ” P” s will continue as long as we all have individual thought, and people will continue to make good and bad decisions, take advice or not take advice.

  11. I can read everything there is about how to drive a FI car. However, no matter how much I read that doesn’t mean I could compete in an FI race, never mind win one.
    What the journalist and to a lesser degree the regulators don’t understand is, the more you do it the better you get. You don’t need exams to be good F1 driver or indeed a heart surgeon, but do it everyday of your working life and at some point you will become accomplished at it. – that is what people buy into. As they say a little knowledge is dangerous.

  12. Chris

    I think you’re missing the point entirely about regulated advice – the fact is regulated advisers pay into the FSCS which journalists and other online providers do not which is an unfair playing field.

    If these journalists and online providers wish to contribute to FSCS then I’m sure that most regulated advisers would not have too much of a problem with information only formats as long as there was not a way of actually executing the business.

    We only have to look at the debacle of Harlequin to see the dangers of not regulating the financial advice as it opens up a whole can of worms in respects to unregulated products and scams.

    Journalists should report facts and news not circumvent consumer rights legislation that is designed to protect consumers from unscrupulous companies and individuals!

    I only have one question: Who on earth is going to pay the compensation for your so-called decision trees when the methodology is incorrect? Answers on a postcard!

    think this article just illustrates the potential disaster that could come about if the regulator does not tighten up authorisation rules!

  13. I think you’re missing the point entirely about regulated advice – the fact is regulated advisers pay into the FSCS which journalists and other online providers do not which is an unfair playing field.

    If these journalists and online providers wish to contribute to FSCS then I’m sure that most regulated advisers would not have too much of a problem with information only formats as long as there was not a way of actually executing the business.

    We only have to look at the debacle of Harlequin to see the dangers of not regulating the financial advice as it opens up a whole can of worms in respects to unregulated products and scams.

    Journalists should report facts and news not circumvent consumer rights legislation that is designed to protect consumers from unscrupulous companies and individuals!

    I only have one question: Who on earth is going to pay the compensation for your so-called decision trees when the methodology is incorrect? Answers on a postcard!

    I think this article just illustrates the potential disaster that could come about if the regulator does not tighten up authorisation rules!

  14. There will always be a need and demand for personalised bespoke advice, but of course as software applications become more intelligent the rise in self service internet consumption will continue. However, internet purchasing is not “advice” in the holistic sense it is more like looking at a which? consumer review and getting product comparison information. Advice for people who want to have lifetime planning and goal planning is less likely to be purchased off the internet, since the lifetime planner’s skill and coaching and guiding skills are what someone is paying for in this instance. . Internet “advice” would probably more to do with features and benefits and comparisons of PRODUCTS, but it will be a bit of a while yet before the financial planning service can be replaced with an algorithm. I hope so anyway.

  15. Michael Winfield 16th March 2015 at 3:41 pm

    Dream land, when free goes wrong, who pays the price, or is free without legal liability, If so it is a charter for fraud.

  16. “Walks like a duck, quacks like a duck”…unless it is regulated by the FCA when who knows what it is or could be in the future!

  17. Of course a lot of people confuse information with knowledge. You can have all the information and “guidance” in the world and still not understand what it is all about. I still think there is a big difference between “guidance” and advice. My satnav guides me to where I tell it to go. It does not tell me why I should go there in the first place, draw my attention to suitable alternatives or point out why maybe I shouldn’t go there. That’s where we should come in. However if people still think “free” advice is worth having what can we do? Frankly I don’t care about anyone who does not seek my advice. My responsibility is to my clients who are of that age group or lifestyle who do not use the internet. I just hope therefore I don’t have to pay for it when it all goes terribly wrong.

  18. Chris,

    Put your money where your mouth is.

    Your advice is certainly free – free of balance; free of warranty; free of responsibility; free of accountability; free of personal professional development; free of most things that hold regulated advisers bound, in some cases for the rest of their lives.

    Stand by your advice and make yourself accountable to your readers for the next 20 years for the decisions they took based on your comments and recommendations.

    What you and your ilk say one day is forgotten and more often than not contradicted by the next.

  19. As I once said to one of my clients “I refuse your kind offer for me to work for nothing”!

    And I suspect that these websites you’re talking about will have either introductory fees (commission) or some other way of being paid.

    So when you say free you don’t actually mean free you just mean hidden!

    RDR version 2 if this is the new business model – you only just have to look at comparison websites in car, home insurance and energy deals to realise that websites don’t necessarily give the best deal.

  20. “Advisers that think the FCA’s current stance on regulated advice is definitive are living in la-la land.”

    Does that mean a regulator that thinks the FCA’s current stance on regulated advice is definitive is living in la-la land too?

  21. I’ve only just read Paul Stocks comment which I think is very pertinent.
    1. For specific advice to a client, then Know your Client is required
    2. For generic advice to a customer, then know your market segment for the market customer is required. The customer can then buy the right product for their segment, it doesn’t mean it IS what anyone would advise, but it is what is suitable for that segment.

    Perhaps it is time the F-pack got it’s head round the difference between a Client and a Customer.

    Our clients come to us for ADVICE. We need to know an awful lot about their circumstances to advise properly (which is time and costly), but by taking out time to know our clients, we can gradually by providing an ongoing service move them to a place where they should be and hopefully with them understanding the logic for any changes as a result of careful explanation.

    That cost however is not cost effective for some consumers and is why Pensionwise for all it’s faults is a necessity, much like “Triage” as operated by many professions, whether that be medical or mechanical (as was my part-time trade in the 1980’s and 90’s). 1st line repairs, 2nd line repairs and so on.

    If you know it is going to be a big job, then go straight for the baseline repair (IFA), but if it’s something quick and easy to get you back on the road, you don’t go for a complete engine rebuild….. BUT it may be a bodge job… so long as you know that and it is all you have paid for, then just be careful. Some things you simply don’t risk a quick repair (such as anything for live overhead firing or pretty much anything in helicopters)

    Just as our “profession” has forgotten that to for good advice to be taken, you need to have a good salesman (it’s common sense really), we seem to be forgetting about common sense with anything whether it be financial services, cars, guns, Gas-safe or whatever which has gone out of the window with our throw away and complain society.

Leave a comment