We need to find a way to provide decent financial advice to more than the sub-3% that feel able to afford it today - if Pensions Freedom is not to become Pensions Disaster

7 September 2015

Since Freedom Day just six months ago the trade and national media have been alive with stories which highlight problems apparently created by the new Pensions Freedom regime. Our view is that many of the issues which have been highlighted and accentuated in the aftermath of Freedom Day were actually already there well before.

There is much talk about the widening ‘advice gap’ - meaning that fewer people can afford regulated financial advice. The advice gap has been a slowly emerging problem which was detectable as early as 2009, more than three years before Retail Distribution Review (RDR). For those looking for the signs look no further than the rise of IFA ‘Wealth Managers’ seeking to target High Net Worth (HNW) individuals who they know they could build a profitable business on the back of, even in the fee or percentage of returns-remunerated world post-RDR.

Last time we reported the findings of The Cass Business School report entitled ‘Challenge & Opportunity – The Impact of the RDR on the UK Market for Financial Advice’. This report concluded that 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 – that’s less than 3% of the 30 million of us employed and of working age in the UK able to afford an IFA! Bear in mind, 70% of us have under £25,000 free to invest today.

These figures may be alarmist but you cannot help wondering whether the price we paid for regulating financial advisers to the hilt may have been just a tad too high. The Personal Finance Society’s CEO Keith Richards commented recently that some advisers have seen a 400% increase in regulatory costs over the last 10 years.

We know that adviser numbers fell fairly dramatically in the run-up to RDR from over 40,000 retail investment advisers to close to 30,000. Many of the advisers that disappeared were focused on serving the mass market – the ‘non-high net worthers’. Bank-based advisers were hit hardest as high street banks ruled that these advisers were creating too many regulatory liabilities and not creating enough income for hard-pressed balance sheets in the deepest and longest recession since WW2.

However, instead of looking hard at the widening advice gap and getting to work to solve it by properly defining a lower-cost simplified advice; they simply got caught up with Full IFA versus Restricted Advice definitions which may have stemmed the tide of advisers getting out of the market but did not deal with the real problem which was the relentless flight of IFAs towards high-networthers.

Having failed to fix that one, HM Treasury decided to launch the biggest overhaul in the pensions market in a generation with Freedom & Choice in Pensions. It pumped money in to enable free guidance to be provided face-to-face by Citizens Advice Bureau, by telephone and email via The Pensions Advice Service (TPAS) and via the Government’s website PensionWise. However, early reports six-months on indicate that these guidance services are not doing their job. Take-up may be as low as 2% of the target market at the very time when the baby boomer generation are reaching retirement age at a rate of up to 700,000 per year.

There are rumblings that CAB, which offers face to face guidance, has not been able to provide appropriately qualified individuals to offer this guidance. If they encounter issues they tend to route people to an IFA who they cannot afford. Alternatively they plough on and cross the line from guidance to advice, without either party knowing it.

To top it all, there is new evidence of a massive upswing of pension liberation scam operations. Again a problem that there was there before but which appears to have been stimulated further by all the changes. So much so that the CAB declared July Pensions Scam Awareness Month. But TPAS and CAB seem to be reliant on IFAs to educate customers enough to avoid said-scams. But in reality IFAs are less and less likely to have the people, most vulnerable to falling prey to these pensions scam operations, on their books.

In the meantime, we’ve seen a growing inflow of assets into D2C platforms so that by the end of this year the D2C platform world is on course to hold £140 billion of assets under management as more of us shun regulated advice and opt to go DIY.

Then there is the rise of the Robo-Advice operations. Already a popular approach in the US, it offers automated advice, presumably based on online questionnaires to profile individuals – making recommendations based on answers to these questions. Providers like this idea as it seems to offer a cheaper alternative to re-building their Direct Sales Forces which might have been the other, less palatable alternative to fill the advice void. LV= recently took a majority stake in robo-advice business Wealth Wizard. However the robots are not taking over the world of advice just yet.

Providers are also seeking stakes in ‘flesh and blood’ adviser operations. Take Standard Life’s purchase of Pearson Jones in February 2015 or Old Mutual’s purchase of Intrinsic the previous February. Others like Zurich have already tied in advice businesses – in their case OpenWork.

However, there is not yet any indication of widespread adviser firm sell-offs to providers. But is this the end-game for the likes of Succession which has bought up 16 firms and intends to complete acquisition of a further 34, controlling £7 billion of funds under advice by 2017? The Succession model acquires preferred member firms from its consultancy and platform business Succession Advisory Services, which currently has 80 members.

Some industry watchers are worried about providers, via the ABI, lobbying for various Advice Lite options which will provide further stimuli to moves to rebuild their own distribution capability. Some even suggest that HMT and the FCA’s Financial Advice Market Review (FAMR) launched last month, may be the result of months of intensive lobbying by providers.

Although this may seem like extreme paranoia, the imminent departure of Martin Wheatley from the FCA almost certainly marks a softening in the heavily-prescriptive regulatory environment which he presided over for the last two years. The only question then is: will the FAMR bring us back full circle to pre-RDR days of providers controlling product distribution? And if so, is this the only way to ensure more of us get the benefit of real financial advice from appropriately qualified individuals? The findings and recommendations of the FAMR will hopefully give us some answers to these weighty questions next spring.

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