Plans for a “single clear definition of financial advice” were outlined in the Budget and the Financial Advice Market Review (FAMR) and it is clear that steps will now be taken to achieve this aim, potentially a pivotal moment for the financial advice sector.
The FAMR panel said this would help make financial advice and guidance more affordable for consumers. The FAMR report stated: “HM Treasury should consult on amending the definition of regulated advice in the existing Regulated Activities Order so that regulated advice is based upon a personal recommendation, in line with the EU definition set out in the Markets in Financial instruments Directive (MiFID) 44.”
Sophie Marfell, Financial Planner at NBS Financial Planning, was sceptical. She said: “Product recommendation is regulated and a firm is required to provide details of the service they provide; that should be sufficient. Beyond that, people will make up their own minds about who they want to deal with and why, regardless of the title it is given.
“I believe time would be better spent simply extolling the benefits of working with a financial professional. If more is done to highlight great outcomes, clients will be more inclined to look for that level of service and move on if they are not receiving it.”
Gemma Davies CFPTM Chartered MCSI, of Uniq Family Wealth, was more positive. She said: “Consumers are still none the wiser as to the key benefits of working with each professional (adviser or planner) and I think that by spelling these points out clearly, this will help them make a clear distinction as to what they need and who can help them the most (as defined by what they are looking to achieve).
"By having clear definitions set at regulatory level, this will help those in the financial community communicate clearly who they are and how they can help"“There is currently a sliding scale between those who operate to a traditional notion of financial advice, those who adhere to the principles of financial planning and those in the middle of the two. By having clear definitions set at regulatory level, this will also help those in the financial community communicate clearly who they are and how they can help.”
Mark Brownridge CFPTM Chartered MCSI, of Accredited Financial Planning FirmTM Mazars, said the FAMR was key to creating clarity. He said: “It is ridiculous the industry has for so long had no clear definition for the very work it undertakes. The difficulty will be coming to a commonly agreed, jargon free, simple concise definition that consumers find easy to understand. Consumers need to be involved in the definition process because if it is left to those in industry, it will be undoubtedly be self serving and complex.”
Paul Welsh CFPTM Chartered MCSI, of Financial Planning Corporation, said: “To ensure they get this right first time, I think the FCA and Treasury should take the time to ensure they fully understand the difference between the terms (planning and advice). To develop these definitions I would like the FCA to spend time talking to firms who offer a holistic and professional financial planning service. I also think the differences need to be clearly communicated to the general public – firms themselves will have a part to play in that of course."
Dan Woodruff CFPTM, owner of Woodruff Financial Planning, said: “The public has no way of differentiating between the two. It is common to see other advisers who say they offer financial planning but then just talk about products. That is not planning, it is advice. I would like the Treasury and FCA to get a better understanding of the difference since financial planning is definitely the direction of travel in the profession. Advisers who do not offer planning should not be able to call themselves financial planners.”
Dennis Hall, Chartered MCSI, MD of Yellowtail Financial Planning, said: “Frankly the FCA has not got a cat in hell’s chance of establishing a set of definitions that would satisfy either the public, or the professionals who use these terms. I would rather they visited the definitions around independent and restricted which would have far more relevance to advisers and the public at this stage.”
CISI Chief Executive Simon Culhane, Chartered FCSI explains the challenges that come with finding a single way to define financial planning here.
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Gemma Davies CFPTM Chartered MCSI – Director at Uniq Family Wealth in Cardiff
Financial advice is already defined by the FCA but, to my mind, it is the relationship between a financial professional and client that is protected as a regulated activity. It involves consideration of a client’s current and/or future financial position and the use of key financial products and services aimed to meet their key objectives. Financial planning is not defined well by the FCA but it does have a definition via the Financial Planning Standards Board. The key difference between advice and planning is that prior to the delivery of any regulated financial advice, a financial planner will consciously implement a stage of discovery to understand, plan and implement a financial strategy that is aligned to the client’s own personal goals and aspirations. It is an evolving process, as opposed to a one-time transaction, and draws each individual element of a client’s financial and lifestyle position to provide one complete picture.
Dan Woodruff CFPTM Chartered MCSI – Owner of Woodruff Financial Planning
To me, financial advice is about product-related research and recommendations; it is about making the best decisions with your current available resources. Financial planning is designed to help you to visualise your future so that you can see the effects of the actions you take now on the future you desire. Planning is not about products, but instead takes fundamental principles to examine different futures so you can take the best possible course of action, and to identify the future assets you will require to get where you want. Of course, both overlap, which is why it is difficult to come up with a comprehensive definition; but done correctly, financial planning is more complete, more effective, and more useful than financial advice.
Dennis Hall – Managing Director of Yellowtail Financial Planning in London
If you consider the pass mark for an exam, the result appears binary: on one side you fail and on the other you pass. In reality it is the point of maximum uncertainty about someone’s competency, yet it is decided over a single mark. To many of us the same uncertainty exists around advice and planning, because the activities of each frequently cross some arbitrary and undefined dividing line. Adding to the confusion, there are some who will argue that financial planning is a subset of financial advice, while others will say the opposite. While the terms are not interchangeable, I find it impossible to come up with a definition that completely removes the ambiguity present at the threshold of advice and planning. We already have experience of the ambiguity and confusion that exists about the difference between guidance and advice, which ironically led to many financial planners staking a claim to the word ‘advice’.
Sophie Marfell – Financial Planner at NBS Financial Planning in Leeds
To me, financial planning is a full appraisal of a client’s current and expected resources, in order to develop an efficient, adaptable strategy to ensure their personal objectives are met. This is what we do in the second step of our process at NBS – after life planning. Financial advice is our third step, where we give specific recommendations on the action needed to meet any financial objectives brought to light in the planning stage. I am not all that convinced of the benefit in the FCA/Treasury spending time and money defining these terms.
Paul Welsh CFPTM Chartered MCSI – Paraplanner at Financial Planning Corporation
To me, financial advice is transactional, relates to some sort of financial product and is typically limited in scope. Financial planning, on the other hand, is a full professional ongoing service. It encompasses all elements of an individual’s financial position and generally requires a cashflow analysis of some sort. Financial planning is a great deal broader than financial advice, with the former incorporating the latter – all financial planners offer financial advice, but not all financial advisers offer financial planning. A firm of financial planners may have fee paying clients to whom they have never recommended a financial product.
Mark Brownridge CFPTM Chartered MCSI – R&D Senior Manager at Accredited Firm Mazars
Generally, financial advice is on individual transactions only. It may involve providing a client with many different services, but these will be provided independently of each other and may or may not be complementary in nature. Advice should be a personal recommendation specific to a client. Typically that will involve the sale of a product or service, and once advice is given, this may or may not be the end of the relationship between client and adviser. Financial planning involves working with clients on an ongoing basis, creating, maintaining and delivering a long-term financial plan. Planning is intended to enable people to define and achieve their lifestyle aspirations. It starts with assessment of existing assets and liabilities to establish how close they are to achieving goals before developing a plan to arrange a client’s finances in the most effective manner. The plan is implemented and reviewed regularly. Planning may or may not involve sales of a product or service.