John Cowan: Industry must cut costs to offer mass market advice

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The market for providing financial advice to well-off clients who can both afford to pay for that advice and understand the benefits of it has never been as buoyant. It’s a different story for those with more modest savings and income where, ironically, there is an argument that the need for good, sound professional advice and guidance is more acute.

However the cost of providing a viable service to this segment of the population is of huge concern to the FCA, advisers and consumers.

Providing advice services to those with modest savings and income costs the same as delivery at the other end of the scale. There are no concessions in process (or indeed in FCA rules) for dealing with these two types of customers. The cost is the cost.

For example, if a financial adviser is asked to review a customer’s pension provision who holds three separate pension policies, there is no difference in the process and analysis that the adviser is required to undertake if total funds amount to £30,000 or £300,000.

The customer with total funds amounting to £300,000 is more likely to value the service provided by a financial adviser and is more likely to be willing to pay for that service. The consumer with total funds of £30,000 may believe that the cost of the service is too high, but advisers are generally unable to reduce their charges materially in these circumstances, given that the cost of providing the service would be the same.

Following the implementation of the Retail Distribution Review, many advisers have told us that the only interaction they have with ‘lower value consumers’ is in relation to auto-enrolment. Largely because the employer (rather than the consumer) has paid for the service provided by the adviser.

Previously, some advisers offered advice on a ‘loss leader’ basis, with a view to securing potential future business, based on their likely future earnings. But the reduction in investment adviser numbers in recent years has led to an increase in the number of medium/higher net worth consumers requiring advice from their firms.

As a result, financial advice firms do not need to make concessions in order to compete for or secure new business. It is also simply uneconomical for advice firms to do so – and the RDR bought that reality into focus for many firms.

What then would encourage advisory firms to develop their services for lower value customers? Being able to reduce their own costs, both now and in terms of future liabilities, are essential in making this work.

From surveying 222 members we found that 94 per cent of advisers agreed or strongly agreed that a reduction in their liability in relation to ‘simpler’ advice scenarios/greater regulatory clarity would need to take place in order for them to provide an appropriate and sustainable service to lower wealth/lower income consumers.

Furthermore, 87 per cent of advisers agreed or strongly agreed that a reduction in their business costs would need to take place in order for them to provide an appropriate and sustainable service to lower wealth/lower income consumers.

In terms of a reduction in potential liabilities (and in order to allow existing firms to innovate and widen the range of services that they offer) we support in principle the provision of a long-stop. We also believe this would help to encourage more new participants into the advice sector.

But this isn’t something that should be rushed into. For example, unless the potential levels of any proposed new industry levy was known, it is impossible to determine whether the introduction of a long stop would meet its aims as the cost of an additional levy may outweigh the benefits.

As the Treasury and FCA consider responses from the Financial Advice Market Review, this is an area that should be examined closely. If financial advisory firms are going to be given the confidence to implement solutions that serve the mass market, they need to be given as much help as possible to cut their costs.

John Cowan is executive chairman of Sesame Bankhall Group