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Graham Bentley: FCA’s work on the advice gap cannot come soon enough

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


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There are 5 comments at the moment, we would love to hear your opinion too.

  1. Julian Stevens 16th May 2019 at 2:10 pm

    Unless the FCA is prepared to rip away the ratchet from its approach to regulation and consider meaningful measures to reduce the burdens of compliance along with our ever increasing FSCS levies, financial planning will NEVER become affordable for the masses. It just won’t happen.

    • This is the crux of the matter.

      It is akin to the Government decreeing that cars must meet standards equivalent to a high-end BMW/Mercedes/Lexus. Sounds great and almost laudable but of no help to the large majority who now have to walk or catch a bus.

      Regulation in its current form has made advice a high risk (for the adviser) and costly enterprise which inevitably increases prices and drives exclusion.

      Any review that wants to end in inclusion will need to address these very thorny (for the FCA) issues. It would require a radical new approach which probably isn’t easy to reconcile with existing political and regulatory tenets and dogma.

      It would not be unreasonable for advisers to simply keep quiet and accept the current situation, after all, it is about as good as it gets in terms of business and income. But that’s not the case, is it? It seems to be advisers that constantly push back and fight for the ability to serve the wider population. Funny that…

  2. William Burrows 16th May 2019 at 2:37 pm

    I am glad Graham highlights the advice gap.

    This is a real issue and many people are not getting the best outcomes because they are not getting advice.

    Many people think they are getting advice when they are only getting information or being sold something without advice (why is there still commission in some non-advised products?)

    Despite the difficulties in running an advice business I still think it is possible to provide financial advice to those lost in the advice gap but this requires a willingness on the part of these people to fully engage in the advice process.

    Part of the problem is many people don’t understand the value of advice and don’t take an active interest in their personal finances. The industry, regulators and government do little to promote the value of advice.

    If the government spent a fraction of the money it spends on promoting its own non-advised organisations on promoting the value of regulated advice we would be a step further forward in helping to close the gap.

    • Julian Stevens 22nd May 2019 at 9:49 am

      Yes, the key is to engender a willingness on the part of vastly more people to engage fully with the advice process. At present, too many people are deterred by the unavoidably high costs of advice (which the FAMR isn’t going to fix), the endless succession of scams and the FCA’s widely publicised failures to avert them (the latest, of course, being LC&F). Without a raft of other measures, what difference is replacing Andrew Bailey likely to make if the real problem is, as we know, a systemic malaise across the entire organisation?

      How can the FCA be improved other than by a root and branch reform of the way in which it operates (described elsewhere by Nick Bamford as 30 years of failure)? The FCA claims to be accountable to the Treasury and to Parliament but, as seen all too often, such a claim is completely hollow. When called to appear before some committee or other, the FCA routinely sheds a few crocodile tears, claims to have learned lessons and that it’ll do better going forward but what, in practice, ever actually changes?

      The reforms needed neither can or will ever happen unless and until the FCA is brought under the oversight of an outside body (such as the TSC) with unassailable powers to tell it what to do and to impose meaningful sanctions for non-compliance with such directives. The closest we’ve seen to that, and then only once so far, was the head of the TSC having to threaten Andrew Bailey with formal proceedings for contempt of Parliament over his refusal to publish the full and unredacted version of its report into the near collapse of RBS.

      Should Bailey step down in response to the recent call from a cross-party coalition of 16 MP’s, how would this fix the problem? Unless his replacement takes on the role with a completely different mind set, what’s likely to change?

  3. George Kaplan 17th May 2019 at 9:31 am

    “The RDR has widened the so-called advice gap…’ I would be interested to know how this gap is defined – only then can we know how it can be addressed.

    However, it’s interesting to note that the author says “has widened’, meaning that the gap (whatever it is) existed before the RDR.

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