Financial advice is a much talked about service but it appears to mean different things to different people.
It seems that there are many advice models in the current marketplace. From an investment management perspective, one would intuitively feel that these differing advice propositions should be linked to differing types of investment proposition.
Advice generally falls into three categories – whole of market, from a limited number of product providers or relating to a single product provider.
From an investment perspective, one could reasonably expect whole-of-market advice to cover a complete range of asset managers, a range of risk-rated portfolios, a range of multi-manager funds, asset allocation advice and a portfolio monitoring and rebalancing service. This level of advice would demand detailed investment knowledge and a wide choice for clients.
Conversely, an adviser offering options from a single provider would seem to fit a different profile. One could expect to see choices from a single asset manager limited to fit the risk profile of the client.
The adviser would be expected to present a packaged solution and to have a lesser involvement in the broader services expected in the whole-of-market option. Requirements such as portfolio rebalancing would be built into the packaged deal and managed by the underlying investment manager.
Overall, the simpler and more basic the advice, the simpler and more basic should be the associated investment proposition. Conversely, the more complicated the advice, the more choice that should be available to the client.
Does the current market reflect these simple and fairly common-sense assumptions? My personal observation is that a number of differing advice models prevail in the market, from a simple product push through basic needs analysis and best advice models to basic and full financial planning services.
Furthermore, the range of investment awareness and competence across advisers operating within these differing propositions varies greatly. This is surprising, given that the consequences of poor advice are severe.
Most concerning is a mismatch between some advice propositions and the associated investment proposition. Let me give you two scenarios. The first is where an adviser representing a single provider recommends a pension with an open-architecture investment offering. The second is a whole-of-market adviser who recommends the pension product of a provider with in-house fund management only.
In these examples, there seems a distinct lack of alignment between the investment offering and the advice proposition.
The first adviser is offering a wide choice of investment managers and funds, which implies detailed knowledge of the managers and their funds. But this offering is single-provider which, by definition, means lack of choice. This is an interesting but important mismatch which is in contrast to the whole-of-market adviser giving no choice.
Why has this anomaly arisen in the market? It seems that it all revolves around a degree of confusion on what is expected from an adviser.
If you think an adviser’s role is to research the market, analyse fund management houses and their funds, have asset allocation skills and build portfolios, then you come up with a very different advice proposition to those that view the role of the adviser as being a relationship manager who helps the client determine their goals and objectives, set a framework of risk tolerance and then recommend company-approved propositions with built-in investment management services.
Enhanced clarity of the adviser’s role would help align the investment proposition with the advice proposition. If it is felt that a mismatch does exist and this has important consequences for the nature of advice given, then perhaps the rules of investment advice should move more towards a principle-based approach which should help to remove this anomaly.
Robert Noach is business development director for UK institutions at Schroders