FAMR must cut costs to close Advice Gap
Slashing the cost of providing financial advice must be a top priority to emerge from the Financial Advice Market Review (FAMR) to help close the Advice Gap, research has found.
Analysis by True Potential points to a dramatic reduction in the number of advisers and increasing costs as the principal causes.
It comes as the Financial Conduct Authority (FCA) and the Treasury close their joint consultation today (22 December), which was set up to investigate the Advice Gap.
True Potential represents 20% of the UK adviser market and has polled hundreds of advisers to identify the root causes of the Advice Gap. The firm has also carried out research into consumer demands and behaviour involving more than 16,000 people across the UK as part of its ‘Tackling the Savings Gap’ campaign, one of the largest studies of its type ever commissioned.
Almost 60% of advisers said the cost of providing advice, including regulation and compliance, is the greatest barrier. 30% identified the Retail Distribution Review (RDR) as the major obstacle.
The investigation by True Potential shows that the number of advisers has plummeted, from around 200,000 sales advisers in 1990 to fewer than 23,000 financial advisers today. This compares to around 150,000 legal professionals and 330,000 accountants.
Meanwhile the fees incurred by adviser firms have soared. True Potential’s own group FCA fees have risen by over 100% in 2015/16 compared to the previous year while the Financial Services Compensation Scheme Levy is up by 133% in the same period.
But advisers are not the only ones to be worse off. Since RDR banned commissions, clients find themselves paying twice: once through a fee, normally taken out of their overall investment; and secondly by missing out on the tax and savings benefits, had the full amount been invested.
Post-RDR, a client paying £100,000 to a product provider will typically see £3,000 deducted to pay for the advice. This means only £97,000 gets the tax and savings benefits versus the full £100,000 before 2013 when the adviser received a commission.
True Potential managing partner David Harrison said:
“The origins of this Advice Gap can be traced back to RDR.
“Too few advisers, too many potential customers, and finally a payment system that encourages financial advisers not to look for new clients or to charge higher fees for their services, easily explains the emergence of the Advice Gap.
“The solution is firstly to encourage more advisers into the market by reducing the absurdly high costs and fees levied on them. The burden of regulation should be distributed fairly and not simply heaped on the larger firms, while the growing number of small and micro businesses offering advice operate with less scrutiny.”
True Potential asked its consumer panel about their experiences with professional financial advice. 76% said that they do not currently have an adviser and when asked why, 35% said they did not wish to pay for advice.
David Harrison added:
“Costs to the consumer must also be addressed. It is perfectly clear that consumers are not prepared to pay for advice and it is hard to think of many other sales processes where consumers must pay for the advice as well as the eventual purchase. It’s an alien concept.”