The financial advice market still has a rich-only association attached to it – and no matter what the industry does it is hard to get away from that connotation.
Research earlier this year by the Financial Services Compensation Scheme (FSCS) revealed that more than half (55%) of those surveyed believe that “paying for advice is for the wealthy” and that more than one-in-five who obtained free advice rather than the regulated variety said they did so because the latter was “too expensive”.
So, are they right – is financial advice too costly and is it just for the wealthy? How can good-quality financial advice be accessed by the less well-off? And whose job is it to lead the campaign for advice for all?
International Adviser spoke with Shard Capital, Canada Life, Progeny, GSB, EV, Loyal North, The Openwork Partnership, Lumin Group and Penta Group for their views and opinions.
Financial advice is not for everyone
Richard Bacon, head of business development at Shard Capital, says that while financial advice is not too costly, it is not necessarily for everyone.
“My personal opinion is that financial advice is not too expensive,” Bacon said. “The problem we are currently facing is that the industry has spent the last 12 years since the global financial crisis washing away the various distinctions between service levels and engaging in a race to the bottom on price. This has been evident in fund-management fees, all the way through to what an adviser can charge their client.
“For example, in a stimulus-driven market, low-cost passive investment strategies have understandably dominated, and price rather than performance has become the primary battle ground. Consumers need to be reacquainted with the concept of performance net of fees over headline fees.
“But just as a holiday in the Maldives costs more than a weekend on the Isle of Wight, we need to re-establish the various tiers of financial advice that are available, in the minds of investors. Financial advice as it stands is not for everyone: the problem lies in the generic term “financial advice”.
However, Bacon does believe that financial education is key for the industry.
He added: “Savers and investors who don’t have a stream of wealth that includes, for example, a multi-million-pound house, a private pension and a stocks and shares ISA, but who have £10,000-£20,000 ($24,800, €23,000) in savings that they want to do something with, could go down the path of robo advice and use a DIY platform. At this entry level they wouldn’t be seeking financial advice but financial education to help them understand how and where to invest their savings.
“Financial education should be a given for all, so that everyone feels included and is given the opportunity to invest and start their own portfolio. If you have a small pot of savings, it’s not worth paying out the fees for an IFA or investment manager, but you still have the option of putting your money to work; you just need to know where to look.
“The pretence that advice should be accessible to all is unhelpful, as is the concept that all advice is equal, when it is not. The advice required varies depending on factors such as the affluence of the individual and the complexity of their affairs. The cost of that advice then varies accordingly.”
Not just for the wealthy
Ian Browne, chief of advisory services at Progeny, believes that it’s not true that “financial advice is just for the wealthy”.
“However, for those who have little in the way of savings and assets, it is difficult to find a model for professional financial advice that is viable or appropriate,” Browne said. “For those that fall in the middle, seeking advice is often prompted by a significant life event, like having children, buying a new home or preparing to retire, especially since pension freedoms were introduced in 2015.
“Essentially, financial advice will always seem expensive if people don’t appreciate the value of what they are paying for and it’s here that the industry needs to find better ways of articulating and promoting the benefits. Consumer Duty is a key driver here as it’s requiring firms to be able to demonstrate the value provided by their products and services and how they create good outcomes for customers.”
Browne also highlights the possibilities of technology and the importance of financial education to bridge the gap.
He added: “Technology, of course, has huge scope for democratising financial advice to broader sections of the population with less complicated advice requirements. Hybrid advice solutions from current market players are one thing but big tech such as Apple, Google and Amazon have already started to move into the financial services industry through their own payment services and could potentially have a huge effect on the world of financial planning, should they choose to pursue it.
“Basic financial education is also hugely important and something that should be better embedded in schools, to help young people understand basic financial products, the risk of debt and how to budget.”
The price of advice
As part of the debate, Dean Kemble, chief commercial officer at GSB, questioned whether everyone needs financial advice.
He said: “Can the average person afford, or want, to pay £300 or £400 per hour for the time and expertise of an experienced chartered financial planner – probably not. I think the questions should be – is it desirable that every consumer needs to take financial advice? And is it possible that we can work to build an industry and environment where not every consumer requires cumbersome (a financial plan is not built overnight) and costly financial advice to make the most of their money?
“Consumers have access to free and impartial guidance from MoneyHelper. The issue is then the fact that UK investment products are typically complex with varying features. Products should be simple and, while Consumer Duty may help, we can’t solely blame the manufacturers as they develop products with their hands tied behind their back to meet the UK government’s complex rules. Nor can we blame advice firms for wanting to charge a particular amount for their services.
“The FCA says that ‘firms should avoid designing products and services to include elements that exploit consumer lack of knowledge and behavioural biases to increase the price paid’. I think that as an industry, we should also be in a position where we don’t need to say that every consumer needs to pay for financial advice to feel comfortable with their finances.
“If you are 35, earning £25,000 a year and want to save something for your future – the government (through its guidance service) should make it clear what the best solution is. An individual shouldn’t need to pay £2,000 for a ‘financial plan’ that tells them to direct £100 a month into an ISA.
“I understand that there is concern over fraudsters and the rise of unregulated individuals trying to give advice on social media, but that’s where the government, via MoneyHelper, has a responsibility to raise awareness and offer straightforward guidance.”
‘The government needs to go further’
Kemble also believes that the government could do more to help.
He added: “The government needs to go further to improve the prosperity of the consumers it represents. Its regulatory and supervisory bodies have influence over the financial-services industry and need to provide leadership. How many people are aware of the UK Strategy for Financial Wellbeing?
“More than half (51%) of the value of ISAs is in cash ISAs: that’s over £300bn sitting in accounts earning a return below inflation and in a tax-advantaged wrapper where no tax is likely to be payable regardless.
“The vast majority of cash ISA holders are non or basic-rate taxpayers.
“That’s millions of consumers who may have the time horizon and an appetite and/or importantly a need to take more investment ‘risk’ to grow their funds – what an opportunity for the government to improve people’s financial well-being.”
Untapped market
Over the last decade, the financial advice market has constantly promoted the message that technology can reach the untapped market that is not served by IFAs.
Chet Velani, managing director at EV, envisages opportunities for those who can balance technology with the human touch.
“I don’t think full holistic advice is expensive,” he said. “But unlike most other industries, there is a gap in advisers’ ability to offer a lower level of service at a lower cost. This is due to the minimum level of work that must be completed to give robust and compliant advice. To reduce the price, less work has to be completed by the adviser, which means transferring some activities to the client or using technology to automate elements of the advice process.
“At the same time, the usual commercials of an advice model rely on new business coming from those who already have money to invest. There are no basis-point returns from clients who are paying down debt or building an emergency fund.
“An alternative ‘Advice as a Service’ model which could give simplified advice to the mass market on broader money matters, would need to be offered on a low-cost basis, unrelated to assets held. However, this is currently hard to deliver profitably by advisers. Workplace financial-services providers and banks, with large customer bases and a different target market from traditional advised clients, are best placed to offer this type of advice for all, which can, in turn increase access to advice for a wider population.
“Technology, including automated processes, artificial intelligence and algorithms, can and will play a key role in bringing down the costs of both holistic and mass-market advice to support more individuals in accessing advice. Pure digital or hybrid advice is the way forward. The key challenge will be to balance the level of automation and digitisation with human involvement – which we know individuals value greatly. There’s a huge untapped market for the firms that are successful.”
A long-term approach
Stuart Pittaway, chief operating officer at Loyal North, also sees potential in hybrid advice.
He said: “The perception that advice is only for the wealthy has been perpetuated in a couple of ways − the RDR, which led to the ‘culling’ of less affluent clients whom advisory firms couldn’t make profitable and the withdrawal of direct sales forces from the banks, which has narrowed the avenues for individuals to seek advice.
“The development of ‘hybrid’ advice solutions, where advisory firms can facilitate a more cost-effective service, both for themselves and also for their clients, has started to open up opportunities for advisory firms to engage with younger, less affluent clients while maintaining their profitability.
“And why bother? To increase the value of the client bank: increasing the longevity of client relationships will inevitably lead to increased multiples when contemplating a sale.”
Younger generations
Technology and financial advice is usually a discussion point when talking about reaching out to the younger generation, who are most likely to insist that IFAs are too ‘expensive’ as they are more likely to lack disposable income.
Setul Mehta, head of partnership services at The Openwork Partnership, highlights a few of the ways that the non-affluent are obtaining the support they need.
“It is a myth that the younger generation are not seeking financial advice, and therefore that financial advice is just for the wealthy. In my experience Gen Z and Millennials do understand the importance of financial planning, and they are going online and listening to influencers.
“Not all stop there, and a good proportion do then follow the journey through to a financial adviser. What has helped with this is the increasing number of younger advisers and mortgage advisers, who traditionally have had a working-class client roster, moving to provide wealth advice too.
“This adviser demographic is providing advice to the masses using affordable charging structures, it is probably just not promoted enough. The key to accessible financial advice is route to market. We have seen through Covid the introduction of ‘lunch and learns’ or ‘virtual education sessions’ leading to more mass-market engagement for financial advice too.
“Financial education and social media can play a large part in engaging ‘disengaged’ clients, including sharing real-life stories, the need for advice, how it can help and what could happen if you do not use a trusted adviser and so on. These are all essential − financial education and social media are great conduits.
“This isn’t just down to the regulator, trade bodies and advisers, you can expand this to employers promoting to employees the need for advice, or celebrities and influencers talking openly about the value of advice, but they must also talk about advice being accessible to all.”
Is it advice or guidance?
One of the key ways to target non-advised clients is the introduction of financial guidance in the market.
In September 2022, the Financial Conduct Authority (FCA) announced it will assess the advice-guidance boundary in a wide-ranging review of the financial advice market review.
The review aims to remove regulatory burdens for advisers and allow them to lower charges.
But, David Cook, partner at Penta Group, says that the difference between providing advice and guidance requires clarification.
He said: “The FCA’s predecessor organisation undertook the Retail Distribution Review to help address two key concerns: the potential conflicts of interest around commission-based financial advice, leading to poor value or inappropriate investments; and poor understanding among consumers of the cost of the advice they were receiving.
“This was paid out of the future returns on their investments and, therefore, despite appearing to be free, was actually expensive. Paying for independent advice up front was seen as one way of addressing both of these concerns.
“The regulator was conscious that this would lead to a significant reduction in the number of advisers and, consequentially, the availability of financial advice.
However, this was actually seen as positive, as the FSA started with the view that people were ending up with inappropriate products and paying far more for advice than they should. To illustrate the FSA’s thinking with an example, someone investing £1,000 should not be paying £500 for advice, even if that is rolled up over 10 years, and would also would probably be better investing in something relatively simple that would not require advice.
Firms are nervous
In November 2022, the FCA launched a consultation paper on proposals for a separate, simplified financial advice regime.
The FCA 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.
But unfortunately, just 7% of advisers currently have plans to offer ‘core advice’, according to research by investment platform AJ Bell.
Penta Group’s Cook said that the problem of the advice gap has emerged not only because of the withdrawal of advisers, but also because firms are “nervous about providing any information that could be construed as advice”.
He said: “The FCA defines advice, an authorised activity, as a recommendation of what investments to make and specifies that it must be suitable for an individual’s personal circumstances.
“Guidance, on the other hand, should help the individual identify options and might include information about different types of investments or set out general principles. With investment becoming more accessible via internet-based platforms and the development of ‘robo-advisers’, the boundary between the two has become blurred. Alongside this, the risks of fraud have grown exponentially.
“Regulators need to ensure clarity for firms on what is acceptable as guidance and when it becomes advice. This will mean firms can invest in helping and educating investors, including through ‘robo advisers’ – most of which are actually providing guidance.”
The value of advice
Instead of focusing on the cost of advice, people should prioritise value for money, says Andrew Tully, technical director at Canada Life.
“Rather than concentrating on cost, the real focus here should really be on value for money,” he added. “What benefits do you get from employing and getting advice from a professional adviser?
“A key point of taking advice is to be better off financially in the long term, as well as having greater peace of mind. The fees you pay an adviser can depend on a number of things, such as the extent of the advice you need, how much time it will take and the amounts of money involved. But an adviser can help you save money in many different ways.
“They can recommend the most suitable solutions – whether that is pensions, investments, mortgages or protection – saving costs over the long term.
“They can help you save more effectively so that your money isn’t hit as much by tax and inflation. And importantly they can help you avoid costly mistakes. Many of us lead busy lives and some significant events only happen to us once – that lack of experience and knowledge can mean, in retrospect, that we would have done things differently.
“An adviser can be that trusted guide to help you through these events as they will likely have experienced your situation many times before.”
‘Driving with the handbrake on’
Jason Coppard, financial planning manager at Lumin Wealth, also raises the question of value for money.
“Numerous studies have found that consumers who receive financial advice are significantly better off financially than those who don’t seek expert help,” Coppard added. “Analysis of these studies reveals that financial advisers can add over 3% per year in net returns for clients on average. In addition, advised consumers can benefit from saved time and reduced complexity, leading to more decisive action and peace of mind over the long term.
“But what represents the right value for money when it comes to taking financial advice? Paying excessive fees or costs can be a significant drag on investment performance over a long period of time. This is akin to ‘driving with the handbrake on’.
“That’s why it’s important for consumers to carefully examine costs and charges, to ensure they are getting value for money when using financial services and products.
“Figures from the FCA reveal that financial advisers charge an average of 2.4% of the amount invested for initial advice. According to the FCA, the total cost of ongoing advice services (including underlying product and portfolio charges) averages 1.9% annually.”
