Budget 2016: Time to harvest the FAMR
In the run-up to the Budget, findings from the Financial Advice Market Review (FAMR) are also being released. This has been looking into key issues surrounding financial advice, including whether the UK public can access the advice they need and can afford. Will it sow the seeds of a new kind of advice?
Once upon a time, financial advice was free. But wait, it wasn’t. Yes, it’s true that many people took what appeared to be advice and were never billed directly for it. But what happened was that advisers were paid commission from product providers, and it was the customer who paid for this commission via increased product charges. As often as not, the customers who didn’t pay an up-front fee ended up paying more for their ‘advice’ in the long term. Not only that, but the products they were sold weren’t necessarily the best for them – because the adviser might well be biased towards higher-commission products
That all changed in 2012. The Retail Distribution Review (RDR) banned commission on investment-related products and required advisers to be transparent about their fees. The result is that advisers now charge their clients directly – but all that’s really changed from the customer’s perspective is that the fees are now in plain sight and not hidden in small print.
However, one side-effect of this was to deter some people from seeking financial advice. The government is now concerned that many are missing out on the advice they need and are putting themselves at risk as a result. The FAMR has been looking into possible solutions.
What might crop up from the FAMR?
The review has been looking at the accessibility of advice for consumers, the barriers that prevent people getting the advice they need, and the value that advice can deliver. It is also likely to make recommendations about how advice can be made more universally available.
One option may be to perform a U-turn on commission and reintroduce it for certain products. This is unlikely to prove popular, however, as it greatly increases the likelihood of more mis-selling scandals.
Another solution that has been widely suggested is the creation of ‘mass-market advice propositions’ to be offered by banks and product providers. These would be simplified financial products provided via a standardised advice process. For instance, someone who wants to convert their pension into a drawdown scheme may be able to choose one in the knowledge that it broadly meets their needs. Such a product might not be the ideal choice for them, but in theory it should be more suited to them than one bought with no advice at all. These simplified, low-cost advice propositions would serve as a kind of ‘halfway house’.
Is ‘advice-lite’ the answer?
It may be that the FAMR recommends the creation of these ‘advice-lite’ solutions. These could well be appropriate for individuals with small pension pots who want a simple ‘off-the-peg’ solution. However, any advice designed to meet a broad range of needs will inevitably be less effective than advice tailored to an individual.
This is because product recommendation is only part of what an IFA does. When you take full financial advice, the IFA looks into your financial circumstances as a whole, assesses your needs and your attitude to risk, and only then considers products that might be appropriate for you. Much of the value of the IFA’s advice comes from this analysis of your circumstances – the very element that is likely to be missing from any mass-market ‘advice-lite’.
Reaping the rewards of advice
The present system of paying directly for advice may deter some people from seeking it. The old commission-based model spread the advice fee over the lifetime of a financial product, thus hiding the true cost from the consumer. It’s ironic, then, that people often struggle to understand the value of advice – because that too is spread over a long period of time. Yet in most cases the end value is many times greater than the (highly visible) up-front fee.
Retirement planning provides one of the best examples. The 2015 Value of Advice report by unbiased.co.uk and MetLife found that people who had taken financial advice saved on average £71 more per month into their pension (from age 40 to 65) than non-advised savers in a similar income bracket. Note that the total extra amount paid into the pension is just £21,300 – but growth and compound interest makes this up to an average of £48,279. So the advice has delivered a clear net benefit of nearly £27,000 over that 25 year period – or over a thousand pounds a year. It is only the long-term nature of the benefit that prevents many people from seeing it.
Meanwhile, full independent financial advice remains the tried-and-tested way to ensure healthy finances both before and after retirement.
Try out independent financial advice for yourself with a free pension check from an adviser near you.