Will the Financial Advice Market Review succeed where previous attempts to close up the widening advice gap have failed?
14 August 2015
So HM Treasury has finally recognised that the ‘advice
gap’ that already existed pre-RDR has widened
considerably since 1st January 2013. The FCA has been
grappling with the issues of defining and regulating
less onerous (ad therefore more affordable) forms of
regulated financial advice for the last 2.5 years since
payment for advice via new product sales commissions was
banned. The last vestiges of a pre-RDR world will cease
on 6th April 2016 when trail commission on legacy
business stops being paid.
The free guidance
service set up to support Pension Freedoms-linked
decision-making was a sticking plaster designed to patch
a specific at-retirement advice gap created by the
ending compulsory annuity purchasing at retirement
announced by
George Osborne back in April 2014.
Hard
analysis of the financials of IFA firms post-RDR present
some cold-hard realities. The
Cass Business School report entitled ‘Challenge &
Opportunity – The Impact of the RDR on the UK Market for
Financial Advice’ makes for worrying reading. The
average adviser expects to garner £1,500 from each of
roughly 150 clients to sustain the £220,000 per year of
gross revenue required to function profitably given all
the regulatory and administrative costs and normal
business operational expenses they must cover. With fees
averaging roughly 1% of assets that implies that the
average IFA client will need £150,000 or more of
investable assets. We also know there are just over
850,000 people living in the UK with this amount at
their disposal for investment. So far so worrying. Where
does that leave the other
30 million of us employed and of working age in the
UK unable to afford an adviser?
Well the answer
right now appears to be that we are increasingly fending
for ourselves and it is perhaps no surprise that the
Direct to Consumer market has been booming so that
by the end of 2015 D2C platforms could well hold £140bn
of our assets. Assets Under Management on D2C platforms
is still growing at a rate of about 20% per annum year
on year.
So is the number of financial advisers
still trading 2.5 years on from RDR falling
correspondingly and at the rates that were reported
frequently during 2013? The reported figures don’t
present a clear picture. Although there was an initial
fall from 40,000 to 31,000 advisers during 2013,
the numbers seem to have stabilised since with only
bank-based advisers being at least halved as a result of
tighter RDR-lined regulations forcing them out of
business. The last two years have also seen a marked
increase in migration from full IFA to Restricted Advice
status simultaneous with a swelling of consolidator
networks like
Tavistock and Succession. But will networks-led
consolidation hasten a reduction in actual numbers of
advisers? The jury is still out.
We are certainly
seeing the real turmoil that RDR has unleashed playing
out in the troubles of some consolidator networks, most
notably
Sesame which has been losing many of the successful
and profitable wealth managers that it might have hoped
to hold onto. Many are migrating back to Direct AR
status. The problem of consolidating IFAs is that
networks’ compliance costs and risks rose exponentially
as more and more adviser firms are brought into the
network because you have to gear the back office systems
and compliance overheads to the lowest common
denominator. For well organised wealth managers it all
starts to feel too slow, bureaucratic and expensive. Big
is not necessarily beautiful in the advice world. But
amid all this turmoil it is far from clear whether
adviser numbers are actually falling or indeed whether
advisers operating today have less client assets on
their books.
However it is clear that HMT and the
FCA would like to see many more of us getting access to
affordable, regulated financial advice. So much so that
they are doing extensive consumer market research over
the next few months to try to understand what’s really
going on. It will report back its findings and
recommendations before the Spring Budget 2016.
Will the Government finally find a definition and
regulatory regime for
Simplified Advice or will they continue to leave
adviser firms with market-limiting levels of risk, as
well as rising costs of that risk and regulatory
compliance? We will have to wait seven months to find
out for sure.
Click here to request a call back or telephone 02392 822 254