It is time to address the needs of the many, rather than the wealthier few
As the FCA’s reviews of the RDR and Financial Advice Market Review arrive, the accompanying music opens with a choir of latter-day saints decrying contingent charging and highlighting the elevation of wealth management to a profession, rather than the tawdry selling of a product.
Of course, many of today’s successful advice firms were established years before 2013. The great majority of those businesses were therefore built on revenues earned from initial and ongoing commissions attached to selling products, and indeed continued to benefit from the trail for another three years.
As for the apparent stigma of “selling”, over the years, my generation saw many a mortgage arranged using commission-earning regular savings endowment policies, and countless investment journeys began with unit-linked pension and other regular savings plans. All of these carried varying degrees of life cover, too.
But consumers – as the FCA likes to call us – were no more financially aware 40 years ago than today’s millennials who are starting their working lives.
Similarly, there were no queues of eager savers outside advisers’ offices. These policies were mostly sold and rarely bought.
This proactive approach by advisers persists today, although that process of persuading clients towards a financial plan might now be described as “behaviour management”.
A centralised investment proposition or model portfolio is still a product. The purchase of pure advice – i.e. with respective fees delivered without supporting portfolios of capital and a facilitating platform – remains a relative rarity.
One has to assume these surviving businesses were not late converts to the state of post-RDR professional bliss, nor formerly savvy salesmen for whom RDR was an epiphany.
Many of their formerly capital-poor customers bought a dream – and the adviser offered a regular contribution product to help facilitate it. Clients who stuck with it over the long term and escalated their premiums have tidy savings today, qualifying as “wealthy”, and therefore suitable cases for consideration by salesmen turned adviser turned “wealth manager”.
So, six years on from the RDR, the FCA’s review has been launched with a call for input. Are prospective clients better served? Regulation defined crookery, but that has not eliminated the crooks.
I’m pretty sure the FCA knows what the scope of its review should include but, thankfully, it is engaging with stakeholders first to establish an agreed set of key issues: agree the scope, then you can’t complain we missed something.
For starters, the regulator should reconsider how it defines success. Among RDR’s official desired outcomes is “a market that allows more consumers to have their needs and wants addressed”. The FCA defines the measure of success as whether consumers understand the difference between independent and restricted advice.
It is pretty clear to me that most consumers could not care less about independence or restriction, and so to use that as a definition of success is rather like defining a successful education system by parents’ ability to differentiate between private and state schooling.
I recall a survey carried out in 2012 which found most people felt that “independent” implied small and local – Trotters Independent Traders, for example.
On the other hand, respondents felt “restricted” might mean special, as per the restricted traffic lanes during the London Olympics. I rather suspect that the average non-wealthy (and hence less-engaged with the wealth management industry) may have similar views.
In the same way that the judiciary does not improve the social mores of the public, the FCA has done nothing to increase the propensity for people to organise their financial wellbeing.
The RDR has done nothing to increase the general consumer’s understanding of the importance of financial planning. I am not talking about planning as a profession – just the plain common sense of planning a humble family’s financial future, advised or otherwise: not paying more taxes than you need to, buying sufficient life insurance protection, and providing a measure of replacement income in retirement.
The savings ratio is close to an all-time low. There is evidence that a significant number of advised clients are contributing less to pensions than they were in 2012.
What is more, over 10 per cent of retirees did so last year while being totally reliant on the state pension, according to Prudential.
In 2013, Scottish Widows found that over half of the UK population with at least one wage earner in the household were reliant on a single income in order to make ends meet for their family. Yet more than two-thirds of people did not have life insurance.
The RDR has widened the so-called advice gap, improving services to the already wealthy and doubling adviser gross income, thereby putting financial advice out of reach of the capital-poor people who probably need it the most.
It is time to address the needs of the many, rather than the wealthier few.
Graham Bentley is managing director of gbi2