Financial advice the Amazon way
By Mark McClelland
Financial advice for consumers is not a happy place. Government and regulators are trying their best to improve the market and safeguard individuals’ finances. But the industry seems to doubt progress.
A major review – the Financial Advice Market Review (FAMR) – was launched by HM Treasury and the Financial Conduct Authority (FCA) two years ago. They wanted to ensure that the financial advice market was working properly for consumers – delivering affordable and accessible advice. The issue was urgent after big changes such as the government pension reforms which means people could access all the cash from pension pots previously locked away.
In March 2016 FAMR came up with a list of recommendations designed to tackle barriers to consumers accessing and engaging with financial advice for saving into a pension, taking income in retirement and investing.
One key proposal is to allow firms more flexibility to train a new generation of advisers: specifically by allowing employees to work for up to four years under supervision to obtain an appropriate qualification and experience. This idea – along with the whole thrust of the need to offer streamlined advice, as well as amending the definition of regulated advice – is set to increase the demand for high quality, easily accessible, flexible and adaptable learning for the financial advice industry.
By August 2017 the FCA said FAMR was going well with the proposals either implemented or on track for implementation by the scheduled date.
However the financial adviser industry seems less sure all is well. For instance, the chief executive of Aviva’s UK Life Business told a conference that FAMR is ‘not good enough’. Andy Briggs agreed that the pension reforms for the over 55s had prompted the need for good advice. He said: “The vast majority of people are doing without advice or guidance and the outcomes from that will be poor. I am convinced they will be poor.” And he added: “Frankly where FAMR has got to so far is not good enough.”
And others in the investment industry are complaining that they are seeing clients make poor decisions, such as taking out a pension lump sum which then attracts tax. But they are unable to intervene because of rules forbidding them to offer ‘advice’. Government appears to have taken that on board; following the FAMR report HM Treasury announced in February a new definition of advice, which is narrower in scope and originates from European regulation. Due to come into effect in February 2018, it effectively means regulated advisers will only be giving financial advice when they provide a personal recommendation.
In a bid to improve the UK’s standard of financial advice, the 28 FAMR recommendations – many of which called for further working together of industry and regulators on factsheets and dashboards or further consultation on technical areas – fell into three main areas:
Affordability: the review made proposals for streamlined services and engaging clients more effectively.
Accessibility: it is clear consumers lack confidence when thinking about financial decisions. The report wanted consumers – and those who advise them – to be able to get hold of their own financial information more easily. It also wanted employers to help more and it wanted consumers to be ‘nudged’ to seek support at key life stages.
Consumer redress: the report wanted to increase clarity and transparency over the way the Financial Ombudsman Service deals with complaints. But it did not address concerns from financial advisers that future possible legal or regulatory actions was stopping them from giving advice.
Regulatory risk is the bugbear of the industry with complaints that consumers should be reading hundreds of pages of documents before investing £10,000 in an ISA, and that is just the simple advice. Yet take out a £10k loan or put on a horse and there is no such hurdle.
With or without novel-length small print, consumers are going to have to take more responsibility for their financial future. And if there is consensus in the sector, then it is around the role that technology could play. FAMR re-definition of ‘financial advice’ should make it easier for advisers – including high street banks – to offer low cost and simpler services that use algorithms to offer general advice and pick out possible investments, so-called robo-advice. The advantage of such advice is that it should be good value for money, accurate and standardised.
It looks likely that advice from a human will only be available to those who are rich. That will leave most of us dealing with a mass market offering via a machine. According to industry experts the key to the success of robo-advice lies in being able to access and then manipulate data. Consumer resistance doesn’t seem likely; it’s clear most of us don’t want to pay hundreds of pounds for advice and we’re used to accepting recommendations from Amazon or Netflix on books, films and boxsets. Why not gilts, shares and pensions?
At the same time, just like every other sector that is being disrupted by technology, the financial advice market has its own challenges to face. The number of advisory firms is shrinking (14,491 in 2015 to 14,054 in 2016) as are profits per firm from £178,557 in 2014 to £145,716 in 2016. And further erosion seems inevitable as new competition from technology players focussed on offering robo-advice comes onstream.
The biggest challenge for any player in this complex and shifting market is to set a sustainable model for how their advisers, salesforce and back office staff can keep up to date with the relentless change in products, regulations and customer demands.
Lumesse can help with the L&D challenges the financial sector faces. For further information and help please contact Mark McClelland – Key Account Manager Financial Services. firstname.lastname@example.org / 07774 758717
If you want to read the FAMR report https://www.fca.org.uk/publication/corporate/famr-final-report.pdf