Just before the Budget was announced, the Final Report of the Financial Advice Market Review (FAMR) was published. That Review was the latest examination of the financial advice market.
To put it in some historic perspective, the Retail Distribution Review (RDR) was introduced to improve the quality of financial advice provided and remove obvious bias. So financial advisors had to stop bundling, and effectively hiding, the cost of advice when selling financial products but had to declare it. This certainly improved the quality of advice to wealthy investors, but has often scared off those less wealthy from taking such advice – which can cost £150 per hour or more. Together with the impact of the more litigious society and growth in complaints, the result has been a substantial fall in the number of financial advisors, and a large gap in the market where those with less than several hundreds of thousands of pounds to invest cannot easily find an advisor. The FAMR calls this an “advice gap”.
The main recommendations by FAMR are that a framework should be developed to enable firms to offer “streamlined advice” that would focus on simple consumer needs, there should be more guidance on how firms can offer services without giving personal recommendations and the FCA should support “automated advice models” (or “robo-advisors” as they are now called).
Two further recommendations in the FAMR report were implemented in the Budget. Namely that employer arranged pension advice of up to £500 will be tax free from April 2017 (i.e. not be seen as a benefit in kind), and that it is proposed to introduce a Pension Advice Allowance from summer 2016 that will allow people to withdraw £500 tax free from defined contribution pension schemes to pay for advice.
Other announcements that were slipped into the Budget were the withdrawal or restructuring of the Money Advice Service. Pensions Advisory Service and Pension Wise service which are to be replaced by a new pensions guidance body and “slimmed down money guidance body” which will commission providers to fill gaps identified in the advice available to consumers. The exact implications of this are not made clear but it rather sounds like “privatisation” of these services does it not, which will no doubt please the finance industry. The Money Advice Service was designed to provide basic and unbiased advice to consumers but has not been greatly used. Those most likely to benefit from it are mostly unaware of its availability, hence the low usage. But the Money Advice Service did spend £100 million developing and promoting its web site, cost £80 million a year to run and the directors alone got paid over £1 million in the year to April 2015. It was financed by a levy on banks who perhaps did not appreciate having to pay for it and it certainly sounds like reform was overdue – there are surely more cost effective ways to provide basic financial information and advice. The Money Advice Service is a poodle of the FCA who appoint its board and arranges its finance.
Comment: One of the big problems is that the general public are woefully ignorant on financial matters. Hence their need for financial advice when their circumstances change or they have money to invest. The Financial Advisory firms may prefer to keep it that way so that they can charge for services when they are needed, although many would argue that the typical person does not like to “think about money”. But the old concept of providing individual investment advice on a personal basis simply led to very high costs and is not viable for most people in the modern world. The Money Advice Service was actually an attempt to provide some simple advice to cover most common situations and actually is quite good at doing that if you look at their web site. But it is so bland in an attempt to be neutral and unbiased that it probably deterred users.
To this writer the problem seems to arise at an early age. People grow up with little education on financial matters and changing the cultural perception that finance is boring is not easy. But it need not be. For example Martin Lewis of Money Saving Expert has made a career out of making it exciting on TV and Radio.
Of course the more complex finance becomes (and the Chancellor just made it more so), the more specialist advice tends to be needed. The FAMR seems more to play to the wishes of the finance industry than meet the simple problems of finance consumers.
Roger Lawson
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