The phrase ‘squeezed middle’ made it into the Oxford English dictionary in 2011 after being popularised by Labour leader Ed Miliband and it could easily apply to financial advice.
One of the biggest concerns for IFAs is that the RDR will lead to mid-market clients being left with nowhere to turn for advice if they are caught between becoming unprofitable for IFAs and a sharp drop in tied sales force numbers.
The concern is that confronting mid-market customers with upfront charges may act as a deterrent to seeking advice.
The Financial Services Consumer Panel is one of a number of organisation that have raised concerns about the growing ‘advice gap’. In May, the FSCP published a paper outlining its opinion on the impact of the RDR, which said the likelihood that IFAs will concentrate on high net-worth clients, combined with the decision of several banks to withdraw their tied advisers, will leave consumers with the option of execution only services.
Consumer Panel chairman Adam Phillips said: “While we are fully supportive of the RDR in eliminating bias and raising professional standards in the industry, it may not solve the ever widening advice gap and we want the industry to look more innovatively at developing appropriate solutions. We believe there is mileage in this, particularly if advice can be linked to reliable products that consumers can trust.”
But even before the RDR takes effect, relatively few people choose to take financial advice. Research conducted by the Chartered Insurance Institute shows that only 30 per cent of people have been sold some form of advised product with 70 per cent having never received advice, similar to FSA findings.
CII policy and public affairs director David Thomson says: “Much of the RDR has been focused on a cohort within the 30 per cent whereas the 70 per cent has never really been tapped. One reason is that they may not have any money but it is also down to confidence.”
Of the 70 per cent who receive no advice 38 per cent say they do not need personal advice, 29 per cent say they could not afford it. However, a third of those who had not received financial advice say they would consider it in the future and if reflected in the total population would lead to 11 million more people taking advice.
Thomson says: “There is an advice gap but there is also a public gap people do not even consider. The industry is being limited to the existing market, whereas there are a lot of people who could take out advice but do not.”
In June, a CII report, Plugging the Financial Advice Gap: Bringing Good Advice to the Mass Market, urges the Treasury to make clear whether it wants the FSA or Financial Conduct Authority to encourage advice or simply prevent bad advice.
It also examines the difference between unregulated generic advice such as that offered by the Money Advice Service and regulated advice with implementation provided by advisers.
It identifies two models of advice that will develop – holistic or specific. For an holistic service clients could receive full, simplified, basic or generic advice, whereas for specific services it would be focused advice or assisted non-advice.
Technology is widely predicted to be the key to meeting the advice needs of this potentially large market profitably.
Firms that specialise in providing online advice already exist. Needanadviser.com is a fully regulated IFA business based in Staffordshire, which operates a fee-only model with different levels of service.
Founder Ashley Clark says: “It is a total myth that clients will not pay a fee. Whether they are high net-worth or not, everybody will pay a fee just as they do to get their walls fixed and cars serviced. It is not the public that needs educating but the advisory market itself on how it presents its services.”
And other firms are eyeing up the potential to develop the mass market of customers who currently do not seek financial advice or who will consider the cost prohibitive after the RDR. One business often used as an example of how to meet the needs of the mass market is Learnvest in the US.
The company offers free generic advice and information and an advice service that costs between $69 for three months’ access to $349 a year, which buys the clients unlimited emails and phone calls.
Jacksons Wealth Management managing director Pete Matthew believes the internet is crucial for the development of a viable mass-market financial advice service.
He says: “I have yet to see anyone provide both implementation and advice online in a good way. Some firms such as Nutmeg are purely investment, where clients have already decided they will invest and they go online and do it. There are also sites such as moneyvista.com which is all information but no implementation. When someone finally nails taking customers through education, information, advice and then implementation online, there is a lot of money to be made. If I could white-label something like that, I would do it tomorrow.”