A couple of weeks ago, the FSA slipped out a statement that may have many IFAs feeling someone has walked over their grave.
Tucked away on page 11 of Annex A of consultation paper 04/11 under point 36 is a reference to a concept that I have never heard of before – “Perfect Advice”.
What some IFAs may find disturbing is that the FSA identified the benchmark for perfect advice by configuring a web-based financial planning tool, in this case, Dynamic Planner from Distribution Technology.
The fact that the FSA now feels able to define “perfect advice” will, I am sure, be of great interest to the many industry representatives who have been pressing the regulator for years to define precisely what they expect of the advisers.
If it can now define perfect advice, presumably the FSA can now also be equally clear about what constitutes mis-selling. At the risk of stating the obvious, if the FSA has defined the criteria that it believes can deliver perfect advice it should surely share that criteria with the marketplace as a matter of urgency.
I am not at all surprised that the regulator has chosen to use technology to define the perfect outcome to varying financial scenarios as it clearly wanted to identify the solution in the shortest possible time.
During the last 12 months, there has been a dramatic increase in the range of software packages available to automate the advice process.
1st Software recently announced some significant enhancements to the automated financial planning tools within its Adviser Office product, Distribution Technology has an integration deal with Quay Software and, of course, the Prestwood system has long been based on a very specific advice process.
These tools are now within easy and affordable reach of advisers and offer the ability to reduce significantly the amount of time needed to produce complex client recommendations. In my view, we have reached the stage where if an adviser does not want to take advantage of this type of software, they are choosing to make their job more difficult than it needs to be.
It is also worth recognising that the financial services community has consistently failed to address how to deliver advice to those who can least afford it – those outside the higher-income groups.
The reality is that the pricing of financial products and advice for the wealthy has never been more attractive. The current conspiracy between the Treasury and the Treasury select committee to create an environment where any advice given is virtually being underwritten by the adviser only serves to drive professional indemnity prem-iums to a level that make detailed financial advice a com- modity that is only affordable to a wealthy few.
Automated advice systems raise the prospect of signif-icantly reducing the cost of helping people with more modest incomes and provide the mechanism to deliver a whole range of lower or fixed-cost advice services. This is not to say that such tools do not have their place in advising the wealthiest of clients.
Such low-cost services would almost certainly not be based around face-to-face advice but more likely delivered using call-centre-based paraplanners and other staff.
In the mass market environment, such technology has the capacity to enable a semi-skilled salesforce to deliver simple products. The software can be used to identify situations where the client's circumstances would warrant the need for more detailed advice. In such circumstances, the case could then be escalated to a suitable qualified adviser.
Just to confuse things further, no sooner does the FSA raise the prospect of “perfect advice” then just a few pages further, page 15 under point 49 to be precise, it questions its relevance. This is on the basis that the FSA recognises that consumers will frequently not follow the advice that is most appropriate and that a professional adviser will understand this and deliver advice that the consumer is likely to take.
To be fair to the regulator, this does show an understanding of the realities of giving financial advice. How often do advisers see clients with a partner and dependants with no life cover but wanting a pension? Trying to recommend something that a client is adamant they do not want, however much they need it, can be a fool's errand. It would appear that, at least to some limited extent, the regulator now understands this.
Combined, these two statements raise some highly significant issues and may show the way for a new advice process. If the FSA will share with the market its criteria for defining perfect advice, should all advisers now start from the position of outlining the solution based on the FSA's definition of perfect advice and invite the client to identify which elements of such advice are acceptable to them and which are not?
Having identified those elements of the FSA's “perfect advice” are not acceptable to the client, the adviser can then put forward alternatives but stating that these are exceptions to the perfect advice model and identifying why they are suitable alternatives. If the adviser has, in the first instance, offered the regulator “perfect advice”, have they not met their obligations?
On one hand, this may appear to introduce a whole new element into the advice process but if perfect advice can be quickly and clearly identified using suitable software systems, the reasons for the deviation from perfect advice can also be recorded with ease, providing a full audit trail.
In the future, will we see situations where advisers will record not only situations where the client has chosen to proceed contrary to their advice but also where they may have given advice which varies from perfect advice but the client accepts that this meets their requirements?
In recognising not only the concept of perfect advice but also that it may frequently be impractical for the adviser to make such recommendations, I suspect that the FSA has opened up a real can of worms. It has, however, to its credit, also shown an understanding of the real world issues facing advisers that has frequently been lacking from its pronouncements. This should not go unapplauded.
Overall, I believe this identifies two important things about the future of financial advice and the distribution of personal finance products.
Automated advice systems are an essential tool for all advisers. It also shows the value of the human adviser who, having used technology to devise an idea scenario, can then modify the theoretical ideal to a practical solution that will meet consumer's needs in the real world.