Independent Financial Advice shouldn’t just be for the wealthy
As the industry regulator, the Financial Services Authority looks for views to radically improve access to financial advice, Savings Champion Chairman Chris Shaw gives his thoughts on the advice market.
When I joined the Financial Services sector in 1984, the market was served in a variety of ways by different players: the large (Industrial) insurance companies such as Pearl and Prudential, more specialist insurance companies such as Scottish Widows and Standard Life, Banks selling their own insurance and investment services, insurance brokers dealing with a number (or in some cases all) of the above and stockbrokers buying and selling shares for clients.
There was a subsection of companies which focused on and served each sector of the market. Stories about young men receiving their first pay packet and being introduced by their fathers to the man from the Pru proliferated. In fact my dad introduced me to his bank manager at NatWest who let me borrow money, so long as I was insured and set up a repayment account.
The Market was flawed, unregulated and driven by a voracious commission culture, but to some extent it worked in that it served the whole market.
Regulation within financial services has been a blessing to everyone involved and frankly much needed. Clients can be more comfortable that they are dealing with a professional adviser and now have the information to clearly understand the costs and risks linked to their decisions. Advisers understand the long term benefits of maintaining strong client relations and so can more clearly identify a long-term career rather than a short term sales opportunity.
However there is an unintended consequence to this change. No one appears able to make the maths work or has the appetite, to offer advice for all clients. Below a certain level (£500,000 - £150,000 of investable assets depending on the firm), advisers believe that the risk/reward ratio just doesn’t work – they would have to commit too much time and carry too much risk so that the potential return would not make this advice financially viable.
No one sells insurance or pension policies door to door or provides a product to the mass market any longer. Commissions on insurance products were high (sometimes more than 100% of the first years premium) but perhaps as a consequence people were at least insured. The old maxim when I was a trainee was that insurance had to be sold it wasn’t bought. I think that’s still true and I wouldn’t have the cover or pension fund I have today unless somebody had taken the time to question my motives, misconceptions and lethargy.
I worry about this unintended consequence of the evolution of this sector.
Different clients have different needs and start their journeys from different points of understanding and the market should be able to accommodate this. At present it doesn’t.
At Savings Champion, we’ve tried to address this in the field of cash savings and we endeavour to offer help and value to all savers. We have free and easy to access information at one end and tailored, paid for advice and service at the other. We can help those trying to save £50pm or a Business wanting to maximise its returns on £5m.
All too often though we are asked for help in areas other than cash because people don’t know where else to turn or who else to trust. Where it’s appropriate (due to complexity and amount) we always refer to Independent, Chartered IFAs. It’s been less easy to help those people who need advice but are excluded from the advice process because they don’t meet the ideal profile for the adviser (i.e. they won’t generate enough income for the adviser to cover the costs they wish to charge and the adviser couldn’t justify that charge to the customer).
This has led to a rise in self-serve solutions which have a place but still don’t really guide the client to a decision. Thinking about insurance and pensions being sold not bought – it works for those who know that they need to do something but not for the rest who need advice.
Recent announcements about pension freedoms have exacerbated this problem. Pensions can be used to provide cash, annuity, drawdown, defer the benefits and can provide benefits to spouses and to other beneficiaries.
But how are we expected to make sense of the complex rules and options and ensure that we have taken account of all of the risks and permutations relevant to our personal situation, especially when we have no experience of being retired and elderly at the point of making the decision. In my considered view, one of the most valuable, aspects of advice is being able to 'lock in to experience' which a adviser has gained in dealing with many others who have travelled the path I’m about to embark upon.
Currently this means that for the majority of the UK population there is very limited opportunity to obtain financial advice and we don't believe this is good enough.