One of the main aims of the Financial Advice Market Review (FAMR) is to make advice cheaper. But what issues do the UK Government need to address if it is to achieve this goal?
A question of regulationPerhaps the biggest hurdle to more affordable advice is regulation. And until the Government cuts the cost of compliance for financial services providers and financial advisers, a drop in price for consumers may not be possible, warn some experts.
Richard Freeman, CEO of Intrinsic Financial Services and a member of the FAMR expert advisory panel, says: “The primary issue is the cost of advice. Financial planning is typically a business of thin profit margins and these are put under ever-increasing strain by the cost of regulation and compliance.”
Advice is a tightly controlled profession for good reasons, of course. But certain changes, such as cutting unnecessary, lengthy disclosure documents for regulators and clarifying the fees that the regulator and the Financial Services Compensation Scheme will charge back to the industry, would benefit both customers and the financial adviser profession, Freeman adds.
“As with any industry, if the cost of compliance becomes a hindrance to innovation and growth, the net outcome will be decreased competition and less choice for the consumer,” says Freeman. He adds that improving the “economics of advice”, so that advisers do not have to either raise fees or reduce the level of service they provide in order to absorb compliance costs, will help ensure customers receive a better service.
Making tax rules on investments simpler and improving training for financial advisers would also help consumers get better value.
Up the numbersMartin Bamford, Chartered Financial Planner and Managing Director at Informed Choice, an independent financial adviser, agrees, but adds that an increase in quantity, as well as quality, of financial advisers would also benefit customers. “The advice gap could be closed by investing more in the recruitment and training of financial advisers, especially with supporting roles such as paraplanners, for which a new apprenticeship standard was recently launched.” Paraplanners support advisers in many ways, in particular with the production of suitability reports.
It is not just customers that need help – advisers need protecting too. The Association of Professional Financial Advisers has said that it wants the FAMR to have a “fundamental rethink” of regulation of financial advice, particularly advisers being subject to unlimited liability – compensation claims from customers for bad advice.
Choice to riseBut ultimately, will the review help investors get better advice? At the very least, it should give them more choice, says Freeman. “Advisers specialise in helping clients understand investment risk and recommending investment portfolios suited to individual personal circumstances. This can’t be provided through investment plans that don’t provide advice, and the review could give more investors access to an investment plan built specifically for them.”
So there is much for the Government, the FCA and the external advisory panel to ponder as they undertake the FAMR. They know that getting financial advice right is particularly important in light of the new pension freedoms.
In the meantime, the financial services industry should hope that consumers only speak to regulated financial advisers that can be verified through a check of the FCA’s Financial Services Register – and that they contact the regulator’s consumer helpline if unsure. The last thing the industry needs is another misselling story hitting the national headlines before the review is complete.
The original version of this article was published in the December 2015 print edition of the S&IR.