The FCA must learn to collaborate if it wants to solve the advice gap problem
There is no questioning the power of regulated financial advice, particularly when it comes to pensions.
Indeed, according to research from IFA website Unbiased.co.uk, taking financial advice on savings can add a whopping £48,279 to a retirement pot on average.
And it’s not just that it can boost savings. In the new pensions landscape of freedom and choice, uninformed retirees could find themselves inadvertently paying too much tax, giving their money to scammers or running out of funds too soon.
Despite this, savers are shunning advice; turned off by the rising costs of taking it and preferring to make their own decisions.
To try and rectify this, and make regulated advice more accessible to consumers, HM Treasury and the Financial Conduct Authority have announced a financial advice market review.
The review will set out to achieve three key objectives:
1. Close the “advice gap”, making advice more accessible to people with smaller savings pots
2. Improve the regulatory and legislative environment to make it easier for firms to innovate and provide affordable and accessible advice solutions for staff
3. Consider ways to encourage people to seek financial advice and remove barriers to entry
Closing the advice gap
One outcome the review will need to achieve is a better way of educating people about the value of advice, and why in many cases it is a cost worth paying.
With an unprecedented number of options open to savers at the point of retirement, making the right choice is more important than ever. Andrew Power, partner at Deloitte, said: “Since the introduction of pension freedoms and the roll-out of auto-enrolment, the need for guidance has greatly increased. This has exacerbated the existing advice gap which, in 2012, Deloitte identified at around 5.5 million people”
The confusion surrounding the difference between advice and guidance has made the situation worse, says Malcolm McLean, senior consultant at Barnett Waddingham.
The retail distribution review (RDR) is a new set of rules that were introduced in 2013. The rules set out to promote transparency in the advice market. Now, financial advisers can no longer earn commissions from providers in return for selling or recommending their investment products. Instead, consumers now have pay a fee to an adviser up front.
“The whole area of information/guidance/advice is becoming very blurred on the back of the pension freedoms and needs to be rationalised and clarified, not least for the benefit of consumers. The introduction of the RDR has clearly contributed to the development of an “advice gap” for those with smallish fund values who are either unwilling or can’t afford to meet the cost of full financial advice.”
Over a third of advisers on unbiased.co.uk say they advise on pension pots of less than £25,000”
Even for people with small pots any additional growth could make a big difference. However, there is an urban myth that advisers do not wish to deal with smaller clients. This, says Karen Barrett, chief executive of Unbiased.co.uk, is patently untrue.
“It’s not the case that only those with large pension pots can benefit from advice, and over a third of advisers on unbiased.co.uk say they advise on pension pots of less than £25,000.”
Improving the regulatory and legislative environment
Most employers and schemes are unwilling to plug the advice gap, confused about the difference between guidance and advice and worried about retribution if people make poor choices.
Darren Philp, director of policy and market engagement at The People’s Pension, commented: “Regulation has created an artificial divide between guidance and advice and this is a recipe for confusion. It is clear to us that advisers are between a rock and a hard place, and often cannot give the help and information that is all most consumers need.
Paul Bucksey, head of DC at BlackRock believes that the FCA’s view is that providers need to help investors, hence the consultation.
It is clear to us that advisers are between a rock and a hard place”
He believes that while providers are usually very careful not to cross the line into advice, savers will need more of a steer in the new world. For example, a provider might need to indicate what a sensible rate of drawdown might be.
Simplified advice could be a good option for schemes and employers looking to provide solutions, says Steve Patterson, managing director of Intelligent Pensions. “The government should encourage the demand for advice through the promotion of lower cost focused and simplified advice models with appropriate and rigorous rules on data protection.
“The concept of ‘safe harbour’ arrangements would work well in trust based DC schemes where the risk of claims against trustees is a barrier to them facilitating access to generic and/or regulated advice. If it’s regulated there should not be a problem anyway, but trustees don’t fully appreciate this.”
The concept of ‘safe harbour’ arrangements would work well in trust based DC schemes
However, it is not all plain-sailing, and there is a concern that if banks or providers move into simplified advice, there could be a risk of mis-selling.
“Unfortunately, I see this review primarily becoming hijacked by the direct sales financial product providers and the banks where they will lobby for a lighter touch regulation so they can introduce “simplified or robo-advice” as it is being called. Basically a flow chart that shoehorns clients into specific products.” Patterson concluded.
Jonothan McColgan, director and chartered financial planner at advisory firm Combined Financial Strategies is not convinced that simplified advice is the future.
“The public did not fare well under previous tied advice from banks but at least they were able to claim redress in the event of miss-selling. My concern is will they still be able to do so when there is no advice just an output from a flow chart?
“With ever complicated taxes and increasingly complex rules on pension accumulation and decumulation, there is an ever increasing need for the public to get the right quality of advice at the right time to safe guard their future.
“Can this really be achieved by ’simplified advice or robo-advice?’”
Encouraging people to seek advice
The regulator needs to do a better job of promoting advice in order to drive people towards it, says Patterson.
“It is frustrating that despite the retail distribution review, the government still does almost nothing to promote the merits of financial advice. All consumers see are negative stories about advice and the government and regulators need to work with the industry to change this.”
The government still does almost nothing to promote the merits of financial advice”
McColgan agrees: “For too long the regulator has forgotten that good financial advice is a really important service for clients, not an industry to be constantly milked through fees and levies for a political whim or mass regulatory failing.
“Only now that there is a lack of qualified advisers has the regulator remembered that it is their job to promote the industry as well as police it.”
Power thinks the key will be collaboration: “Ultimately, any solution will require a collaborative approach between consumer groups, regulators and the industry, as all will have a role to play in tackling existing barriers.”
Whether the government can work with the industry to come up with sensible and pragmatic solutions remains to be seen.