The big question: is commission going to be re-introduced? The short answer: No. You cannot re introduce something that did not go away. Remember basic advice? The RDR specifically exempted it from the commission ban. Perhaps the solution to the advice gap might see basic advice reincarnated – if, of course, there is an advice gap in the first place.
The recent Office for National Statistics UK Wealth and Assets Survey identified 26 million households in the UK. Thirteen million have less than £5,000 of net financial wealth and 50 per cent of those have negative financial wealth (assets less debt, excluding mortgages). None of these households will be looking for investment advice.
A further 2.5 million households have more than £5,000 but less than £12,500 net financial wealth. I do not suppose many in this segment will have much capacity to invest in risk assets so the advice gap is not a major issue for them. One could argue they should be making regular payments into some sort of long-term savings vehicle but persuading them will always be challenging, hence automatic enrolment.
Another 2.5 million households have between £12,500 and £25,000 net wealth. If there is an advice gap it is probably centred on this segment: less than 10 per cent of all households in the UK. What’s more, I would suggest the majority of people with less than £25,000 net wealth should probably not commit too much to risk-based investments.
In any event, this type of consumer probably does not need, and cannot afford, the sort of service provided by highly qualified professional advisers. What they are more likely to need is basic advice. OK, the model is restricted to “stakeholder” Isas at the moment (and I do not think there is much chance of this being extended) but they seem sensible for this segment.
Need for change
The problem is maximum stakeholder charges are 1.5 per cent per annum for the first 10 years, followed by 1 per cent per annum thereafter. No entry or exit fees allowed. The concept did not work about a decade ago, not least because neither advisers nor providers could see a way to make money out of it. So things need to change.
First, the FCA will have to lower the qualification level for advisers to advise on this product. Firms cannot expect advisers who have gained QCF level 4 to restrict their advice landscape to an Isa, and the margins are too narrow to fund a fully qualified adviser.
Second, the Financial Ombudsman Service and the adviser community need to have absolute clarity about the concept of basic advice and the detailed parameters.
Third, the new basic advice model will need to be highly automated with limited telephone access to advice. Happily, hardware and software are in a very different place to 10 years ago in terms of cost, access, connectivity, functionality, governance and the entire customer experience. If players believe they can deliver full advice via “robos”, delivering basic advice should be a piece of cake. But will it be a valuable piece of cake?
Technology costs have reduced substantially over the last decade, so designing, building and running the product and the advice process should be significantly cheaper. In addition, the use of index funds has the potential to reduce charges dramatically. It seems to me money could be made, in particular by vertically integrated firms, including banks and consolidators.
So where is the role of the traditional IFA and restricted adviser in all this? My guess is that of spectator. Relaxed spectator. If there is an advice gap and if basic advice can be calibrated to fill it, then all well and good. But professional adviser firms are designed to meet quite different needs and that brings me back to the ONS survey, which concluded there are about eight million households with net wealth of more than £25,000.
Now I appreciate most advisers are looking for clients with more than £25,000 net wealth (and I also know I have been accused of using data like a drunk uses a lamppost: more for support than illumination) but I estimate these eight million households have average total wealth including property and physicals of well over £500,000. And about one in 10 is a millionaire.
Looking at other data, I guess approaching six million of these eight million households have up to £250,000 net financial wealth and about two million have significantly more than that. In any event, with about 20,000 fee-based professional investment advisers, we are looking at about 400 households per adviser. That strikes me as a sensible supply and demand equation. In fact, a pretty good outcome from the RDR.
So will the Financial Advice Market Review reincarnate basic advice? The answer might be yes. And if at the same time it can somehow create terminology that defines types of advice in a way that actually resonates with consumers, then only one challenge remains: ensuring great outcomes for clients while sorting out the regulatory overload that sometimes makes the advice process expensive to deliver.
Malcolm Kerr is senior adviser at EY