Vince Smith-Hughes(pictured), Director of Specialist Business Support at M&G Wealth shares his views with IFA Magazine on the FCA’s consultation paper CP22/24 “Broadening access to financial advice for mainstream investments” and explains why he’s never felt more positive that the times really are ‘a changin’.
We seem to have been talking about the advice gap for a long time. Despite this, evidence suggests any action taken to date has been ineffective.
The latest Intelliflo (1) advisory business impact poll shows that almost three-quarters of advisers (73%) believe the advice gap has widened over the last five years, with six in ten (62%) blaming the pandemic for increasing the gap.
So, what can be done? On more than one occasion I’ve heard that it’s down to advisers to open their doors to more customers, with potentially lower sums to invest. I think that’s at best a vast oversimplification, and at worst somewhat disingenuous. With ever-increasing technical, market, legislative and regulatory issues to manage, most advisers simply don’t have the time to open their doors to more clients. This then has a knock-on effect that their costs have increased, and inevitably that needs to be passed onto clients. In short, there is a lot of people who would benefit from advice, but simply can’t afford it.
When you put all of this into the mix it’s hard to reach any other conclusion other than the increased use of technology is one of the keys to solving this puzzle. In this regard we need to be careful that we don’t fall into the problem highlighted within the quote normally attributed to Voltaire, – “the perfect is the enemy of the good.”
What do I mean by that? Well, here’s an example. I was at a conference a few years ago and a well-known advice firm was running through the prototype of a semi-automated advice service they had developed for dealing with people with moderate pension pots at retirement. Overall, I thought the process looked really good, and a positive step forward in what could be achieved combining technology and human interaction. However, one of the attendees seemed to take a fundamental objection to this, stating “there is no way this type of service could ever cope with meeting long-term care requirements, including the local authority assessment and equity release options!” Fundamentally I agree with the sentiment, however that misses the point that technology solutions can help thousands of people reach a better outcome, despite the fact they are not receiving a holistic financial planning advice service.
For all of these reasons I was intrigued to see the FCA consultation paper CP22/24 “Broadening access to financial advice for mainstream investments”. For the cynics amongst us this may have a feeling of déjà vu, for example the FSA guidance consultation paper on simplified advice was released more than a decade ago, and there have been numerous papers and guidance since.
So why is this different? For a start and going back to my comments earlier about being able to reach more people even if the proposition is limited, initially this is only looking at potential customers for stocks and shares ISAs. This doesn’t seem a bad place to start though. The FCA’s Financial Lives Survey (FLS) identified that approximately 4.2 million consumers hold £10,000 or more of investable assets mostly or entirely in cash despite having some appetite to take investment risk. The intention of the new regime is for advice firms to find it cheaper and easier to provide advice to these customers.
The key changes the FCA propose to make are as follows
· Reducing the existing qualification requirements to reflect the lower risk of this narrow scope advice
· Reducing fact find requirements. Though there are some criteria that adviser firms need to satisfy themselves about the client’s financial situation, they do not need to gather information regarding protection, pension or other investment arrangements held by the client
· Reframing the existing suitability requirements to reflect the narrower scope and complexity of this advice relevant to the decision that consumers will be making
· Limiting the possible investments advisers can recommend under the new regime to a mainstream stocks and shares ISAs (with some exceptions which the FCA regard as higher risk or complex) up to the value of a new subscription, i.e., £20,000
· Allowing greater flexibility in charging structures to allow consumers to pay for transactional advice in instalments
The FCA does however stress on several occasions throughout the paper though that advisers will need to be compliant with existing rules and specifically the new rules on consumer duty.
The FCA also confirmed in the paper that firms may choose the new regime to offer this advice through different means, which could be face-to-face, virtual, telephone based or through digital means such as hybrid or robo-advice. It’s hard not to reach the conclusion though that this approach could lend itself well to some form of journey which is partially digitalised.
It seems to me that the FCA has proposed a reasonable first step here to extend advice out to those who currently cannot afford it. For those wishing to contribute to the consultation it is open until 28 February 2023. It is proposing that the final rules and guidance will be issued in Spring 2023, with the proposed implementation in time for the start of the tax year in 2024/25.
Given the importance of enabling more people to access advice, M&G started offering its human-led digital ‘at retirement’ advice offering in December 2021, through its own Wealth Advice service. So far 1,300 customers have used this service. Key to this service is the gathering of information electronically, but with a human adviser providing the advice. Gathering information in this way has reduced adviser time by just around two thirds – a cost saving we are pleased to have been able to pass onto the customer. The vast majority who have gone through the journey to date come from our existing customers, who have no external adviser and nor would they typically fit into an IFA’s normal target market.
Furthermore, early in 2022 M&G invested a significant sum in digital investment specialist Moneyfarm, which focuses on younger investors in the accumulation phase. We expect that over time these clients’ needs will become more complex, with many at some stage needing holistic financial planning.
While we’ve been talking about the advice gap for a long time, I’ve never felt more positive that through a combination of changing regulation and advances in technology that we can start to close the advice gap and reach the millions of people who can really benefit from quality advice, delivered in a streamlined way.