How can government get people the financial advice they need?
A collaborative project between the FCA and the Treasury could have a profound impact on the future prosperity of the nation
Working at a business that has an intimate relationship with the adviser community, I am fortunate enough to witness first-hand the remarkable impact that quality financial advice has on people’s lives.
It empowers people to protect their families against difficult times, build a financial legacy for their children and realise ambitions in their personal life that would not otherwise be possible without the solid foundations afforded by a reliable financial plan.
Yet many people choose not to take advice, often with troubling consequences. The new pension freedoms provide a perfect example of the risks faced by consumers that go without counsel from an expert. While offering consumers a welcome opportunity to take responsibility for their retirement income choices, pension flexibility also presents challenges. A spike in fraudulent pension activity and the tendency of some savers to dis-invest and park their life savings in cash are just two examples of the pitfalls many people are inadvertently stumbling into.
Recognising those risks, the Government demands that investment and pension companies such as Old Mutual Wealth highlight key risks and prompt customers to consider taking advice. It is now advancing further by announcing a formal review of the advice market. This promises to address both the supply of quality financial advice and also consumer demand for the right financial support. Specifically, it promises to “address barriers which put consumers off seeking advice” and confront “regulatory or other barriers firms may face in giving advice and how to overcome them.”
So, what are these barriers and how can we overcome them?
Firstly, the industry must acknowledge that it has not done enough to explain the benefits of financial advice. You could have a 53 per cent increase in retirement income if you see an adviser regularly and have an income target in mind. Yet many do not recognise the value it can add.
When we asked YouGov to help us explore what customers felt about financial advisers, 90 per cent of those with a financial adviser said they would recommend their adviser to a friend or family member. Only 4 per cent of those that had worked with an adviser said they were disinclined to do so in future. To put that in context, Apple, the pre-eminent consumer brand of a generation, achieved a customer retention rating of 90 per cent on its iPhone range in 2014, according to research analysis carried out by Morgan Stanley. Even against this yardstick, financial advisers experience astonishing levels of customer satisfaction and loyalty. Despite this, as the Advice Market Review highlights, those consumers without prior exposure to financial advice often fail to recognise its value or to overcome the perceived barriers that stand in the way of taking advice.
Part of the problem is that advice in 2015 is administered almost exclusively by small, local advice businesses. As the statistics show, they do a very impressive job of supporting their customers. But this model of advice is not designed to deliver advice to all those that need it.
While the traditional direct salesforce—”the man from the Pru”—was far from perfect, it gave normal people access to straightforward financial advice and the right product with which to build a simple plan. Unfortunately, many people are now unable to access the kind of basic financial planning that today’s retirees enjoyed during their working lives.
To make advice more accessible to a greater number of people, the footprint of financial advice must grow and adapt to meet the needs of today’s customers.
In order to do that, advisers must be empowered to offer their services cost-effectively. Tying advisers up in regulatory red tape and charging them for the privilege via ever-increasing Financial Services Compensation Scheme and FCA levies places a severe handicap on the economics underpinning the supply of advice.
A sensible regulatory framework for financial advice would enable the industry to offer advice services to the ‘mass affluent’, those who ‘work hard and do the right thing’, as the review’s terms of reference put it. This means those with relatively modest savings of between £10,000 and £50,000. At present the advice market caters to those with more substantial savings—although that it is not to suggest that every wealthy individual that would benefit from advice chooses to take it—but struggles to help those with limited wealth. Mass affluent customers would benefit from more widely available, affordable advice options. This can only be achieved by delivering advice on a larger, national scale, with centrally controlled processes and product solutions that are affordable and accessible to many.
I believe large, financially strong advice businesses, providing the same quality, consistent advice service nationally, are best to lead the market in this area.
Advice, like any other service industry, must also embrace digital strategies as a means of providing a leaner, more efficient delivery of its product and better engagement with customers. As an industry, we have appetite to evolve digital investment services and I hope regulators and policymakers will continue seeking to create an environment that cultivates innovation.
With the infrastructure in place to supply advice, we must also address demand. What are the barriers that people perceive as an impediment to informed financial decision-making?
Our research shows that cost is a major factor. It was the most commonly cited hindrance factor, according to our research with YouGov, which found 37 per cent of people feel it acts as a barrier and 31 per cent fearing they would be paying for something that they don’t need. To allow customers to make an informed choice about whether advice is right for them, we must produce clearer explanations of the costs and, crucially, the benefits of financial advice. At present, too few people recognise the role a financial adviser might play in their life. Giving existing advised-customers a higher profile and helping them articulate the story of their own advice journey will be an important part of that.
Advice is required now more than ever and the FCA, acknowledging the growing “advice gap,” has described the Advice Market Review as an opportunity to “radically change the advice landscape to the benefit of both firms and consumers.” It is a huge challenge, but by embracing this opportunity, we can contribute in a huge way to the future prosperity of the UK.
The UK’s household savings ratio is in long-term decline. According to the ONS, households saved more than ten per cent of their income in all but one year of the 1980s. In contrast the last time it peaked above 10 per cent was in 2001. Last year it was just 6.4 per cent. Contrast that with Germany, where it remains at nearly 10 per cent today.
Widespread and repeated neglect of our household finances has major ramifications, not only for he individuals affected by subsequent hardship, but also upon our economic prosperity as a nation. A lack of “rainy day” saving and basic insurance cover are major concerns, which hamper economic activity and restrict our ability to cope with short term financial uncertainty.
But my primary worry is that people are simply not saving enough for retirement. An elderly population with limited financial capability creates a strain on society. Pressure on governments to uprate old-age benefits, fund health and care costs and offer means-tested financial support will only grow more acute.
Increasing the uptake of financial advice will help tackle this by giving people access to professional tutelage on the essentials of basic financial planning, ensuring they build a secure financial plan during their working lives and the resources to enjoy a prosperous retirement.
Paul Feeney is CEO of Old Mutual Wealth
Prospect‘s Andy Davis will be hosting a panel discussion on financial advice at this year’s Conservative Party Conference. Andy will be joined by Harriet Baldwin MP, Jeremy Quin MP and Carlton Hood, Customer Director at Old Mutual Wealth. The event will start at 5pm on Tuesday the 6th of October. For more information, please email email@example.com. Please note that a conference pass will be required to attend this event.
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