When providing advice is uneconomical for financial advisers
I remember in the period leading up to RDR the buzz was that this would be the chance for independent financial advisers to be treated in the same way as an accountant or solicitor. The key distinction is that the commission system sometimes led to a transactional approach where individuals would use advisers to complete one-off transactions but wouldn’t always enter into an ongoing relationship with their adviser.
I think that this was correct and that it enhanced the growth of financial planning as opposed to transactional financial advice. Indeed, there is now a serious argument to be had between those that separate the financial plan from the underlying products which are just required to facilitate the plan.
Financial planning has taken off - as you can tell from the calls for ‘financial planning’ to become a ‘regulated activity’.
On this route to a more relationship-based service, we saw the introduction of pension freedoms in April 2015 which changed the advice landscape once again.
Suddenly, instead of an income, it was possible to now encash a whole pension in one go. As a result, a number of people wanted a one-off transaction either with or without advice and advisers had the difficult decision about whether or not they were prepared to undertake such transactions.
My own straw poll of advisers told me that since April, many advisers have seen some demand for pension encashment, but not at the levels they expected.
I believe it is fair to assume that with an adviser/client relationship in place there has been little or no encashment of pension funds unless it would enable a client to achieve a specific objective. It is more likely that where there is no adviser the demand would be higher, with the policyholder contacting the provider direct to ask for his money, thus invoking the second line of defence.
There have been some stories of providers refusing to pay out the money and I am not sure if this can be entirely justified where the client is the policy holder asking for his money in line with the contract terms.
So we are left with a group of individuals who are seeking to withdraw their cash in a one-off transaction, who have never paid for advice, and who do not know how much a reasonable charge is, but would still object to paying a fee.
We also have appropriately qualified advisers who are used to providing a full financial plan and who do not want transactional business, particularly at the lower end of the market, due to the lack of profitability, not to mention the regulatory risk legacy.
The needs of the demand side of this have resulted in various pieces of published research showing figures that would appear to be the maximum amount that consumers would be prepared to pay for the services of an adviser. For example, research by Aegon shows maximum figures of between £191 and £253.
AJ Bell’s own research told us that, on the supply side, almost one in five IFAs found it difficult to advise clients on pension freedoms if they have less than £100,000, and for 5% of respondents that figure increases to £150,000. Over three quarters (78%) of the advisers we questioned said they have had to turn clients away because it is uneconomical to provide them with financial advice.
Within the word ‘uneconomical’, there are many different types of cost and liability associated with being a financial adviser.
An overwhelming majority (77%) of advisers say their main barrier was the regulatory costs associated with giving advice, while 40% said business costs were a prohibitive factor.
The potential liability advisers have to take on when giving advice is seen as a barrier to providing advice by just over half (51%) of advisers. This is perhaps best illustrated by the defined benefits transfer and insistent clients debate.
There is a degree of entrenchment with advisers who have sufficient demand for their services and who make the profit that they want without having to change their business model.
Facing them across the divide are members of the public who may know what they want but certainly do not know what they really need. When questioned on fees, they offer up a fairly random answer to the question of how much is the maximum they will pay.
The task facing the FCA and the Treasury with the FMAR is to pave the way for a bridge to join the two sides – certainly not an easy task.
We are at a tipping point and, as an industry, I can see three thing that we need to achieve:
- Individuals need to be educated to understand the value of financial advice
- The providers of such advice could seek ways of more efficiently providing such advice (if they really want to)
- The FCA could play their part by considering the regulatory and liability costs providers of advice face
A very real and very interesting challenge.