THE City watchdog has launched a review this week to unearth if investors are getting value for money when it comes to financial advice. The Financial Conduct Authority (FCA) review aims to work out, among many things, if the existing advice structure is working — and affordable — following the Retail Distribution Review (RDR) and the Financial Advice Market Review (FAMR).
The Retail Distribution Review transformed the advice market in 2013. It was designed to weed out commission-hungry advisers, aiming to bring greater transparency to costs and driving up the professionalism of advisers. It ruled that a fee would be charged for advice, so advisers get paid whether they recommend products or not.
Moving to a fee for advice meant that advisers were no longer influenced by providers paying the highest commissions to sell their products. But it also meant that advisers had to assess and price how much work was devoted to each client. The net effect was that advisers found that the time involved meant that fees were too high for modest investors or investors with basic needs. In effect, the switch to upfront advice fees priced small investors out of the market by making it uneconomical for financial advisers to advise anyone but wealthier people. This resulted in many High St advice firms disappearing and even banks phasing out bank advisers who typically helped mainstream customers.
Not the first review…
The Financial Advice Market Review (FAMR) reviewed RDR and made recommendations to improve access to advice for example by improving guidance. Hugh Savill, director of regulation at the Association of British Insurers, said the advice market is not working for most people. He said, “The measures proposed in the Financial Advice Market Review were supposed to lower costs and narrow the advice gap, but this has not materialised in reality.”
The FAMR recommended ways to make advice more affordable, more accessible and to improve consumer protections. Despite significant demand from the industry, the FCA has not sufficiently lightened the regulatory load when it comes to providing guidance, making it less worthwhile for providers. At the same time, the FCA report admitted concerns about those who do pay for advice, suggesting many are paying for a service they don’t need. “Consumers can struggle to assess the cost of advice and may overpay for services which they do not need,” the FCA said in its consultation paper.
The FCA review plans to gather evidence on how to build on the success of existing reforms and extend consumer access to advice and guidance while maintaining high levels of consumer protection. Guidance is an important factor in this review as this is what services the tens of millions of people who can’t afford, can’t get access to, or neither want nor need to pay for full advice.
Tom McPhail, head of policy at Hargreaves Lansdown, said, ‘There’s plenty of evidence that access to the right guidance and reassurance can transform people’s confidence, their engagement and their attitudes to investing; ultimately it can make a significant positive impact on their financial futures. The availability and the certainty around the quality of guidance hasn’t been adequately addressed yet. Too often firms are still wary of crossing the boundary into inadvertently giving advice and as a result they stop short of giving the guidance their customers seek.”
Take advice or go it alone?
The matter of getting professional advice versus going it alone has long been debated in financial services. More and more investors are choosing to select their own investments, many using the research tools available on platforms to assist their decisions. Experts maintain that while many investors are capable of running their own investment portfolios, advice is still crucial for certain financial decisions. Pensions is an area that many argue should still be largely advised.
The FCA has previously raised concerns about the number of retirees using pension freedoms without an adviser. The pension freedoms — introduced in 2015 — have caused concern among many who are worried that the over 55s will overspend and run out of money during their retirement.
An adviser can help predict how long a pension pot that is placed into income drawdown is likely to last, based on the level of income that is to be taken. It is not an exact science, because it will also depend on how the stock market performs. But an adviser could help set sensible withdrawal levels, with an idea of how long the savings would last. An adviser would also make contact when reserves start getting low, allowing time to perhaps reduce income taken or a review at the very least. Those who take an income from their pension without advice, however, must work this out on their own.
Financial advice comes with its own protections. Getting advice from a trusted and qualified adviser means that you can take a case to Financial Ombudsman Service (FOS), or the Financial Services Compensation Scheme (FSCS), if things go wrong. Ultimately, it’s a personal choice.