Just 7% of advisers currently have plans to offer ‘core advice’, investment platform AJ Bell has found.
In November 2022, the Financial Conduct Authority (FCA) unveiled its plans for a separate, simplified financial advice regime. The regulator said the changes will allow firms to provide mass market consumers with straightforward financial needs greater access to simplified advice on investing into mainstream products, specifically within stocks and shares ISAs.
The key features of proposed core advice regime include:
- Simplifying the customer ‘fact find’ advisers are required to undertake;
- Limiting the available investments and restricting advice to Isas worth £20,000 ($24,269, €22,813) or less;
- Making qualification requirements “more proportionate” to reduce the cost of delivering advice for firms; and
- Allowing advice fees to be paid in instalments.
Conducted as part of the firm’s response to the FCA’s consultation on ‘core advice’, AJ Bell’s survey of 146 adviser users of its platform found 7% said they intended to offer core advice to their clients. Some 41% said they would not provide core advice, while 52% were undecided.
The main reasons given by firms who said they wouldn’t offer core advice included being focused on servicing wealthier clients (31%), commercial – advice fees for such a service would be too low (24%), already having enough clients (19%) and concerns over potential liabilities (17%).
Concerns
In its consultation response, AJ Bell raised a number of concerns about the proposals.
These include the likelihood that the transactional nature of core advice may lead to large numbers of orphan clients; fears that consumers may struggle to differentiate ‘core’ and ‘holistic’ advice, and therefore fail to recognise when they need full holistic advice to meet their needs; and the danger that the narrow scope of core advice lends itself to a sales-focussed bancassurance model.
It is instead calling on the FCA to set out clearly its plans for the review of the advice/guidance boundary. This review should focus on addressing factors which unnecessarily increase the regulatory burden on advisers, raising the cost of giving advice and preventing it being accessed by more people, as well as enabling the delivery of more help and support to non-advised customers through guidance.
Tom Selby, head of retirement policy at AJ Bell, comments: “The FCA’s overarching aim of encouraging over four million people who might have ‘excess cash’ to invest that money for the long term, in line with their risk appetite and financial goals, is laudable. This is particularly important during a period where high inflation threatens to erode the value of people’s savings.
“However, the regulator’s ‘core advice’ reform proposals are extremely limited in nature and, at worst, could risk poor consumer outcomes if firms are effectively encouraged to flog products rather than focus on providing ongoing advice. It is also far from clear advisers have the appetite to develop propositions that could sit within this proposed regime.
“Although limited reductions in qualification requirements, a reduced ‘fact find’ and narrower fund range may have a marginal impact on the cost of providing advice, we do not believe this will result in sufficiently lower advice costs to make serving those with Isa funds worth £20,000 or less attractive to the advice community.”
Risks to consumers
Selby also added that there is also a “real risk” that encouraging core advice will lead to poor consumer outcomes.
“The FCA envisages charges for core advice sitting somewhere between £100 and £200 – the only way this could be made to work economically would likely be if huge volumes of sales were pushed through, most likely via major banks,” he added.
“This creates a fairly obvious danger that we could see a return to a product-sales focused environment, which in turn increases the risk of mis-selling. While we appreciate the Consumer Duty should help mitigate this risk, it is important to acknowledge the potentially negative behaviours core advice could encourage.
“The regulator also seems to envisage a world where adviser-client relationships in core advice are often transactional and potentially one-off in nature.
“While this may suit some advice firms, most will likely want an ongoing relationship with a client, in part to ensure their advice remains suitable and good outcomes are maintained. For many advisers, the fact this is limited to a single product will also be unappealing.”
Orphan clients
AJ Bell also believes that the FCA’s plan to encourage more people to take one-off advice risks “creating an army of ‘orphan’ clients who could be left in the advice wilderness”.
Selby added: “Given the regulator has been specifically trying to find better solutions for these clients as part of its work on implementation of the Consumer Duty, it would seem incongruous to then facilitate an advice model which is likely to make the problem worse.”
He also explored that there is a risk those people who might take and benefit from ongoing advice might shift to core advice, perhaps because they are attracted by the lower associated fees.
“While this might save them money in the short term, they will lose the benefit of ongoing advice over the long term,” Selby said.
Boosting guidance
Selby added: “Given the size of the advice gap challenge, the FCA and the wider industry needs to focus efforts on the area likely to improve outcomes for the largest number of people – guidance. At the very least, potential improvements to guidance which facilitate simpler, more intuitive customer journeys should be looked at alongside core advice.
“Even if demand for core advice – both from the industry and customers – exceeds our expectations, there will still be millions of savers and investors who either can’t afford to pay for advice or choose not to take it, or both.
“It is therefore critical that policymakers are focused on ensuring both the advised and non-advised parts of the market are able to support people as much as possible. Lack of clarity over the advice/guidance boundary remains a significant challenge in providing useful information to those who choose not to take advice.
“It is critical the FCA now sets out clearly how it intends to proceed with its promised advice/guidance boundary review, which has the potential to improve outcomes for far more customers than the proposed core advice regime.”
