The RDR Advice Gap
You may have heard of something called “the advice gap”. This is a relatively newly coined phrase used to describe the expected result of the FSAs Retail Distribution Review. The accusation being that as a direct result of RDR, fewer people will receive advice. Why? because in order to receive advice, clients will have to pay a fee, commission is banned. You would be forgiven for assuming that I would be delighted by such news – after all, I set my firm up in 1999 on a fee basis, our clients pay fees. True. However my clients are not “average people”. They have wealth and want to use it to enable them to improve and maintain their lifestyle for the remainder of their life. They are forward-thinking and responsible. They are independently minded and not reliant upon the State (or presumably a fairy godmother) coming to the rescue.
Complexity Breeds Paper
As I have said before, my clients are therefore not the “norm”. There are many people that have great difficulty with their finances and have little understanding of or the ability to apply many financial planning concepts. The cost of providing financial advice has soared. Unlike many other professionals (doctors, lawyers etc) financial planners cannot simply provide one page prescription. There is mountains of paper justifying why something needs to be done, how it has been selected and so on. This is largely to satisfy the regulator and also a future court of law, should a complaint be made. Neither are terribly inspiring reasons are they? In addition, all advisers have improved technical skills and the financial landscape has become ever more complex, with the need for ever more expert guidance.
End Of The Free Lunch
RDR was intended to break the relationship between the product provider (pension/life insurance company) and the adviser which could be manipulated by extra or different commission between products. This created a decidedly uneven playing field and provided precisely the motivation in 1999 for me to create a level playing field so that there was no difference in our charge, irrespective of provider or product, thereby demonstrating impartiality. Frankly RDR could have simply stopped there. However from January all advisers will have to charge a proper fee, ending the myth once and for all, that advice is free. Unfortunately, advice and service is rather expensive, despite the many advantages that technology brings to efficiency of productivity. As a result, many people will be understandably put off paying fees, in the same way that many are put off paying for a dentist, or eye check up etc. It is also the case that good financial planning needs regular reviewing. A distinction between a financial planner and a financial adviser is probably that the former doesn’t really focus on products, and provides a regular review service. An adviser, well probably could be a one stop shop – sorts a problem but doesn’t really join everything together. Why regular reviews? well think of your planning a bit like a plane flight, one degree off course at the start may not make much difference for a few miles, but if not corrected will ensure that you don’t make it to your intended destination. A financial planner is like the pilot, adjusting the financial architecture regularly to keep on track.
In practice this means that many people on average or below average wages will probably not pay for financial advice. They will be forced to do-it-themselves. As a nation, we aren’t good at looking after our own long-term interests when left to our own devices. Think of all those gym memberships in January. Of course, some people are, but most simply lack the required discipline or knowledge and let’s face it finance is fairly dull, (OK very dull). I recently attended a talk by a well known adviser who writes in the national papers who summed up his 40+ years of advising people with only one couple investing sensibly when left to their own devices. However, this couple sat down every day to review their portfolio. To my mind that is not financial planning, that’s investing and terribly stressful and rather a waste of life.
Another Banking Crisis?
To compound the problem, Banks are not trustworthy and most will not be providing financial advice, earlier this year (or perhaps last, its all such a blur or excitement) analysis was done that revealed that the cost of a Bank providing advice was at least £250 an hour. Given the current climate, can you see that working? no? neither could they – so they have stopped providing advice to all but their high net worth customers, though I have no idea why these people use them as the Banks are really rather poor at advice and service. Coincidentally, when the FSA ceased their own final salary scheme in March 2010, they offered staff the option of seeking independent financial advice about their options offering £250 towards the cost of the consultation. This at least acknowledges that independent advice is best, but clearly fails to appreciate the cost.
Back To The Future
Just to put a final twist on things, from January advisers will either be “restricted advisers” or “independent advisers”. In other words back to polarisation that should never have been scrapped in 2005. It only enabled Banks to sell more stuff that they weren’t able to understand. This has led to the term “the advice gap” which simply put means – people that won’t or cannot afford financial advice. Most financial planners will have to focus on their more wealthy clients, yet very few (and I really mean a very small percentage) actually have a workable, sustainable business model that enables them to look after clients properly and profitably, ensuring that they are there to do the same next year. Fortunately for me, I’ve been developing and improving my business and services since 1999, so have a rather long head-start on most.
Technically RDR comes into effect on 31st December. So that’s just under 4 weeks time, but allowing for the Christmas season – rather fewer days. The House of Lords has finally begun to understand the implications of the advice gap and has been debating the topic, in a typically empty looking House. Interest is frankly nowhere except within the industry, but it does or rather will have a dramatic impact on everyone in just a few days time.