Four years ago, sweeping reforms were introduced to the financial advice market, aiming to improve free transparency and professionalism.
According to AXA Wealth, there is only one adviser for every 2,700 people in the UK
The rules, known as the Retail Distribution Review (RDR), banned advisers and wealth managers from taking commissions from the products they recommend. Instead, they must charge a fee direct to the customer for the advice provided.
Four years on, the RDR has broadly achieved its objectives: consumers are better informed about the cost of advice and professional standards have risen.
However, one of the biggest unintended consequences has been what many describe as an ‘advice gap’. This has been caused by high street banks, investment management firms and financial advisers withdrawing services for those with less than £100,000 to invest. They argue the cost of servicing these clients has become too high.
“With regulatory requirements increasing, investment minimums are on the rise because advisers are faced with higher costs. This is causing a large percentage of the population with disposable income available to invest to go without access to financial advice,” explained Gemma Godfrey, founder of Moola - a robo-advice firm.
A number of advisers also used the RDR as an opportunity to leave the industry, leaving many ‘orphaned’ clients behind.
Regulation Exacerbates Issues
Stephen Kavanagh, chief executive of financial advice firm Chase de Vere, believes the advice gap was not caused by the RDR, but rather the regulation exacerbated existing inefficiencies in the market.
“Many of those who could afford advice could only do so because they were being subsidised by other clients who were paying too much, receiving a service based on product sales to generate commissions. Alternatively, they were receiving little or no ongoing service,” Kavanagh explained.
“So while these people could access advice beforehand, it might not always have been good quality advice which was in their best interests.”
More than four years since the RDR shook up the market – how big is the advice gap?
According to AXA Wealth, there is only one adviser for every 2,700 people in the UK who require help with their finances. This compares to ratios of one adviser per 1,400 people in Australia and one per 156 savers in Hong Kong.
Back in October 2015, the Citizens Advice Bureau charity estimated that 5.4 million Brits are willing to pay for advice but not at current prices, while 14.5 million are unable to pay for it altogether.
The figures suggest that many UK consumers are making big financial decisions alone, at a time when they have unprecedented control over their pensions. Over the past five years, auto-enrolment has gradually been introduced, making workplace pensions mandatory. This was followed by the ‘Pension Freedoms’ in April 2015, which axed compulsory annuities, giving those aged 55 and over full access to their pension pots.
Regulator Steps Up for Savers
The good news is that the advice gap is on the agenda for the Financial Conduct Authority, the regulator, alongside the Treasury. The two organisations have launched the Financial Advice Market Review, which is ongoing and aims to ensure that affordable advice and guidance is available to everyone.
Three financial guidance bodies have also been set up in recent years: The Pensions Advisory Service, the Money Advice Service, alongside Pension Wise. The government now plans to merge all three to create a single guidance organisation.
“Collaboration between the government, FCA and the personal finance profession is essential to improve access to financial advice, and we need to see more proactive promotion by the government to encourage consumers to engage with the market,” said Keith Richards, chief executive of the Personal Finance Society (PFS).
Paul Killik, founder of wealth manager Killik & Co, says the aims of the FAMR must be applauded. However, he believes the review is not doing enough to tackle the advice gap.
“The FAMR was full of good intentions, but nothing concrete has really come out of it,” he said.
Killik is concerned that regulation is making it harder for investment management firms to offer advisory dealing services. This allows the private investor to have input over how their money is managed. He says this is a shame because it is driving investors to two extremes: the ‘DIY’ execution-only route or having their portfolio fully managed by a professional. Investors who are in the middle ground are therefore missing out.
Is There a Solution to the Advice Gap?
Since the RDR was introduced, robo-advisers have sought to address the issue, with new entrants and established firms offering online services for those with smaller sums to invest. Some deliver investment management online, while others provide automated financial advice. They are typically powered by computer models, known as algorithms, and involve little or no human interaction.
Although Kavanagh recognises that technology has the potential to plug the advice gap by offering lower-cost services to a wider range of people, he believes the robo-advice market still has much further to go before it reaches this point.
“Most robo-advice services currently operate as a means to sell their own investment propositions, rather than giving genuine financial planning advice,” he added.
Andrew Power, a consultant at Deloitte, suggests financial literacy amongst the UK population needs to improve in order for the masses to truly embrace robo-advice.
“It is all well having some technology there, but will people actually use it?” he asked.
Power expects robo-advice to develop over the coming years, expanding into mortgages and retirement planning.
Four years since the RDR, it is good to see there are a growing number of options available for those priced out of financial advice. However, some of these organisations have little to no track record, so do not be afraid to be selective – and most of all, clear about your objectives.
