The Power of Financial Advice
Professional financial advice has the power to fundamentally improve the quality of life for those who access it. A wealth of recent research shows that consumers who have engaged with the financial advice sector are significantly better off in retirement than those who haven’t. It is equally true that financial advice ensures families are better protected from the unexpected, and therefore, in the event of a tragedy striking, are much less likely to have to rely on state benefits. But it’s not just about the money.
Consumers who take advice are generally more confident and better prepared. They display improved financial literacy, reassurance and peace of mind and have increased mental health and well-being. Those who receive advice know their decisions are backed by the knowledge and expertise of an adviser, which provides them with greater confidence about their financial security. Data shows that the vast majority (86%) of those who have taken professional advice had a positive and beneficial experience.
Yet, despite this, the majority of the population do not engage with professional advice, which remains restricted to the more affluent. This is confirmed by recent survey findings, which show that just 10% of those surveyed had taken paid for advice and, of even greater concern, 79% of those who had not taken advice had no intention of taking it in future. This lack of uptake is grounded in three basic reasons, being a lack of awareness of the benefit and need for advice, a more general lack of trust, and cost.
On this last item, the regulator has to bear at least some of the blame for widening the advice gap. The cost of compliance has risen significantly since the introduction of the RDR and continued to rise with the implementation of MiFID II which, whilst seeking to improve customer outcomes, had the unintended effect of pushing up the cost of advice. The time and resource needed to comply with the requirements has an effect on price models. Advisers have struggled with inconsistencies when getting data from platforms as part of cost and charges disclosure under MiFID II; the product governance rules have created challenges arising from the extensive data expected to flow from large-scale asset managers to much smaller advisory firms, who often do not have the systems or the staff to handle this information as effectively as they would like; the requirement for annual reviews of investment portfolios is forcing advisers to turn away clients with more modest portfolios as they are no longer profitable.
But it is the FSCS levy which has emerged as the biggest culprit, along with the rising cost of PII. A recent survey carried out by PIMFA found that, for 45% of respondents, FSCS costs had risen by over 100% in the last five years whilst, for PII premiums, 26% of respondents had seen a rise of over 100% in the same time period. Whilst we strongly support the role the FSCS plays in ensuring consumer confidence in the financial services market, levies have increased to an unsustainable level in recent years and the impact on the sector means that there is the need for a fundamental change to the system. Ultimately, these costs are borne by the consumer, making advice more expensive and less accessible.
In recent years, social and demographic changes ranging from an aging population and changing employment patterns to the introduction of pension freedoms and increased digitalisation have combined to make the decisions people face more complex and varied. The Covid pandemic, affecting by its very nature people’s health, families, employment and finances, will have significantly increased the number and severity of issues affecting consumers.
As a result of this, PIMFA have for some time now been working towards the creation of a simplified advice regime that works across wealth management, investment services, financial advice and hybrid models and we have crystallised our vision for this in our recent paper, The Future of Advice.
At the outset, we call for HM Treasury to undertake a fundamental review of the definition of advice. Currently, that definition is derived from European legislation but, now that we have left the EU, there is a clear opportunity for the Regulator to review the architecture of the Handbook and provide a clearer distinction on the boundaries between advice and guidance and for this to be determined by objective criteria.
We go on to make a series of recommendations for government, the regulator and our industry. These include the industry developing new, lower-cost services to provide effective financial advice to a wider market, improve on-line protection by extending the Online Safety Bill to cover scams and other financial harm, and for all three stakeholders to promote the value of advice and the advice sector and ensure effective sign-posting to advisory services is in place.
We need to build a robust advice industry, fit for the future and effective across our society as a whole. A market that works well for advisers by allowing firms to thrive, develop and innovate, for consumers by being equitable and providing good quality, trustworthy advice and, ultimately, a market that works well for the UK economy by increasing levels of savings and investments and overall financial well-being.
First published in Raconteur