I have no idea what financial advice is like in Northern Germany but as the Financial Advice Market Review rumbles towards a close this side of the North Sea, one is increasingly reminded of Lord Palmerston’s famous aphorism: “The Schleswig-Holstein question is so complicated, only three men in Europe have ever understood it. One was Prince Albert, who is dead. The second was a German professor who became mad. I am the third and I have forgotten all about it.”
At first it all seemed so simple: give people the right to access their pension pots from age 55. However, the new freedom brought with it new responsibilities, not least the duty to ensure investable assets deliver an income in retirement that lasts a lifetime. To achieve this reliable retirement income stream without buying an annuity means investing in the markets via drawdown.
Put another way, pension freedoms have utterly changed the risk landscape in the mass affluent market. Having created this new framework, the Government now wants to mitigate the risks to the consumer. Thus the FAMR.
In its call for evidence the FAMR sought information on “the extent and causes of the advice gap for those people who do not have significant wealth or income”.
From the adviser side of the equation several solutions to the advice gap have been proposed, from reduced qualification requirements and regulatory safe harbours or sandboxes, to the reintroduction of limited commission as a means of overcoming consumer resistance to upfront fees.
These supply side remedies are often explicitly or implicitly proposed in the context of rapidly developing digital technologies – the ubiquitous robo-advice, assumed to offer economies of scale such as to significantly lower advice firms’ overheads on a per client basis.
In the meantime – and even before the FAMR reports – some high street banks have announced their own supply side cure: their return to an advice market exited not so long ago in the wake of fines and regulatory interventions.
It is possible to raise objections to each of these responses. The service offered by banks could arguably be defined as product sales rather than independent financial advice. Safe harbour has been construed (in other quarters) as legitimising inappropriate advice so long as the underlying product is held to be satisfactory.
Meanwhile, reduced qualifications for advising on simple products raises the issue of line drawing. What precisely constitutes a simple product and what are the implications of creating a two-tier system of independent financial advice? As for robo advice, will it ever replace the need for the human interaction inbuilt into regulated advice and financial planning?
Some of these arguments are stronger than others. But a more fundamental objection is possible, one which challenges the existence of a supply side deficit at all. Leading the charge is the FCA Consumer Panel. In its view, regulated financial advice is no different in character than other professional services for which there is lesser or greater demand.
For example, accountancy services are accessed by some consumers but not by others, yet there is neither talk of an accountancy advice gap, nor claims the price of accountancy services is excluding consumers. The Consumer Panel sees no evidence of pent-up demand for advice in the mass market.
The advice gap is a fiction, it concludes.
This is possibly going too far. But focusing on an absence of demand – rather than simple undersupply – does encourage a more rounded view of consumers. It opens up a debate about factors that inhibit consumers beyond the purely financial or economic.
Let me mention just one: culture. If neither you, nor your family, nor any friends have ever taken regulated financial advice in your life, then it is a big step to do so.
It means confronting financial realities that you might rather not confront. It means gathering together all those bits of paper you have stuffed in a box at the back of the cupboard because it is just too hard to think about. It means laying bare your financial circumstances before a stranger. It means thinking about getting old. For sure, there is a whole lot more to the advice gap than the cost of advice.
Gregg McClymont is head of retirement savings at Aberdeen