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.