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Sue Whitbread: The thorny issue of advice vs guidance

Consumer confusion over advice, information and guidance is holding them back from engaging with financial advisers and planners.

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So the discussion rages on about what constitutes financial advice as opposed to information or guidance.

Whilst we all agree on the need to provide more help to enable people to make better financial decisions we are still not consistent in our use of the word advice. The more confusion there is, the less likely consumers are to engage with the process so isn’t it time we sorted this out?

It appears that even some people working in the financial advice sector are not clear where advice becomes regulated investment advice so it is no surprise that consumers are confused. The recent discussions between the FCA and the Treasury Select Committee brought up the subject again as part of their biannual progress report.

Then there’s the Money Advice Service consultation around their 2014/15 business plan. The MAS website adds further confusion, stating “we provide free and unbiased money advice”. The cost of regulation is a genuine barrier to regulated firms providing cost effective advice to the mass market, even more so if the public think they can get advice for free.

It is clear that more needs to be done to help people manage their money better across the UK. The MAS states “people often know what they should do but don’t act on this knowledge”.

This is why the role of the financial planner and financial adviser is so important, although MAS has managed to alienate planners and advisers: the professionals best placed to help people take appropriate action.

Thinking back to the days of generic advice and decision trees, we have to question whether a web or phone service providing generic guidance would be the most effective means of ensuring people actually take action.

That’s not to say there’s no room for it. We clearly need to boost the supply of financial capability, however, a lack of human intervention didn’t work then so why would it work now?

Whilst financial planning, like advice, is a term which means different things to different people, we believe that the financial planning process can play a key part in resolving the savings gap in the UK.

At the heart of financial capability is having a financial plan in place. At the IFP, we believe that the financial planning process enables the creation of a sound financial plan in six steps:

  1. Establish your goals in life; short, medium and long term
  2. Work out what assets and liabilities you have and write them down
  3. Evaluate your current financial position. What does your budget look like & financially how close are you to achieving your goals?
  4. Develop your plan, create a “route map” for achieving your different goals, protect yourself
  5. Implement your plan – make the changes and make it happen
  6. Monitor and review your plan at least yearly and make adjustments when needed

Many of the steps can be taken without the need for regulated financial advice; if it is needed it only comes in at step five. Such a plan provides the all important context for taking decisions around products and solutions, making sure that they are based on the client’s goals in life. It’s a powerful proposition and one which CFP professionals regularly report as inspiring their clients into taking action, as they can see why they need to take the steps, in order to get what they want from life.  

Whilst the debate around advice is bound to keep going, we suggest two key things everyone can do right now to get closer to resolution.

First, encourage consumers to think about steps one to four, making them more likely to take action and make decisions to improve their financial capability.

Second, we can start by defining ‘advice’, ‘information’ and ‘guidance’ clearly and consistently and not using them interchangeably.

Sue Whitbread is head of communications at the Institute of Financial Planning

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Comments

There are 5 comments at the moment, we would love to hear your opinion too.

  1. I totally agree – I have raised the matter with the FCA as to what is actually regulated. Is it the advice, the advice that leads to a regulated product, or the product itself, or none or all of these?
    The Financial Planning process above could be construed that stages 1 to 4 are unregulated and then only stages 5 and 6 are regulated.
    That being the case, does that now mean any fees for the first 4 stages are now not regulated? Incidentally the regulator was unclear of the answer! They did suggest the research was regulated if it led to the taking out of a regulated product but when I pointed out that this would mean Paraplanners would need to be registered individuals, they then changed their tune. It is all too woolly and the MAS are an unregulated entity, that we fund, who would appear to be giving ‘advice’ – well according to their name at least! If the regulator and we are confused, then what chance has the public got!

  2. What is confusing for the consumer is not the process of giving financial advice, it is the individuals who pose to be qualified to give that financial advice.

    Do a simple search online for financial advice and how many websites you come across that are glorified marketing firms selling data onto regulated companies. Is it no wonder why the consumer is confused after all there is no regulation according to the FCA for setting up a website and collecting data on the promise of providing financial advice. In my professional opinion this is covered by the FSMA 2000 and the FSMA 2012 but the FCA seems to think that it is an exempt service under journalistic rights. Of course this is total claptrap and I’m afraid this is the FCA running scared or just simply not doing its own job clamping down on online activity.

    If you would point me towards the sections of the FCA handbook that allows a so-called financial planner to carry out a pension review up to stage 1 to 4 I’d be interested to see it because I thought any personalised recommendation or process was regulated!

    I’m not talking about a one line in the rules that may or may not give exemption. I am talking about the spirit of the rulebook and trying to get back consumer trust of financial services because it sure as hell hasn’t achieved that in the last 10 years of regulation thanks to turning a blind eye.

    More importantly who pays the compensation when these so-called guidance services get it wrong because they sure as hell don’t pay any FCA fees. Oh I forgot it’s the adviser category that pays the compensation when they go bust.

    Maybe it’s about time we had a degree of fairness in the system and if this type of guidance is going to be allowed than these guys need to pay their fair share of the fees.

    Even unbaised.co.uk is not registered with the FCA!

  3. I think it is interesting (but wrong) that this article suggested advice is only needed for stages 5 and 6. In regard to 3, how does the man or woman in the street accurately evaluate how close they are to achieving their goals? And in regard to 4. how does the man or woman in the street plan a route map when they don’t know which is the best route to take nor how much the “fare” is to travel on different forms of “transport”? It is a great pity that such articles are needed, what a sad regulatory we all live in when the cost of regulation and compliance makes the provision of good common sense advice unaffordable for the people that need it most. Maybe we should all just focus on stages 1 to 4 and become “Life coaches” and then leave the client to disembark and arrange their own execution-only investments. That’s kind of what’s happened with unregulated investments, and with the labyrinthine rules and regulations being developed by the academic no-nothings one can see how regulated advice will become ever more scarce. Shame really.

  4. The definition of regulated advice is relatively simple. Check the definition of ‘advising on investments ‘ in the Glossary in the FCA Handbook. It’s only a few lines. Technically, anything else isn’t regulated advice though PERG makes clear that the context in which information is given can, and does, have a bearing.

    In essence regulated advice is about communicating the merits of buying or selling a specific investment (but there are exceptions, e.g. journalism). On that basis none of the six steps outlined in the article necessarily constitutes regulated advice unless this step is also included.

    There is no ‘issue’ of advice v guidance. In each and every case it is a matter of fact whether it is one or the other based on what are quite simple and clear rules. Whether the public understand the distinction is another matter. Add to this that MAS is allowed to describe itself as giving advice and it serves to confuse matters more.

    Regulation is part of the problem and as Einstein said “We cannot solve our problems with the same thinking we used to create them.”

    Stop writing new rules and inventing new guidance. It might look good but achieves little. These are a crutch for weak and ineffectual regulation. Take a step back and look at what is really important… clients and whether what you are doing right now is making their life better.

  5. What is ‘guidance’ and when was this added to the melting pot?

    Grey area is right, the definition of advice is clearly set out in the handbook. The key aspect for me is that a specific product has to be involved, if your taking about a financial plan, aspirations, asset allocation, debt management, savings etc. this would not be classified as advice.

    In my mind there is advice – which is defined – or information which may or may not help a consumer to make thier own decisions.

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