Budget 2016: Will we see a new kind of advice?
Perhaps you weren’t aware that something called the Financial Advice Market Review (FAMR) was even happening. But there’s every reason to be interested in the findings, which are out now. Whether or not you think you’ll ever need financial advice, the FAMR’s recommendations are likely to affect all of us in some way over the coming years.
Reviews are like buses – yes, you know how the saying goes. The Retail Distribution Review (RDR) in 2012 put an end to the commission-based model of financial advice, which had resulted in many people receiving biased advice and had led to various mis-selling scandals. The RDR dramatically increased the quality of advice on the market, raising standards and levels of professionalism. However, it came at a cost. There are now fewer advisers out there, and the fact that advice must now be paid for directly by the consumer has deterred many people from seeking it.
This has raised concerns in government that there is an ‘advice gap’ – a section of the population who need financial advice but who aren’t accessing it, for whatever reason. So the Financial Advice Market Review (FAMR) trundled off in August of last year to assess the scale of the problem and look into possible remedies. The report has now rolled in, so let’s look at the most interesting bits.
Problem: People who need advice on their pension may think they can’t afford it.
Possible solution: It could become possible to access a small part of your pension pot before age 55 in order to cover any advice fees.
Pension advice can dramatically increase your income in later life (for instance, just taking advice on an annuity can save you thousands of pounds over the course of your retirement) and can also help you avoid very costly mistakes. But paying for that help up-front may be difficult for some people. The proposal to let people use a small early withdrawal from their pension in order to boost the rest of it makes logical sense – like a sort of down-payment against the future benefits of the advice. This is a change to be welcomed, if it happens.
Problem: Many have only a vague understanding of their pension savings.
Possible solution: There is a proposal to create a universally available ‘pension dashboard’ by 2019.
It’s easy to lose track of pensions – how many you have, how much is in each pot, how they work, what special benefits or guarantees may be attached to them, how well they are performing over time, etc. Currently there are several projects looking into the feasibility of a pension dashboard – an online platform where people could see all their pensions (including the state pension) in one place. Ideally data would be sourced directly from providers (users shouldn’t have to enter it themselves), would update in real time and would include the ability to make future income projections based on different scenarios.
A major factor in the ‘advice gap’ is people simply not having enough information to make sound choices. A dashboard should go some way to addressing this. In the meantime, some advisers offer free pension checks that can give you a similar level of understanding.
Problem: Not everyone wants in-depth advice, but may still want professional guidance.
Possible solution: There are proposals to develop a new kind of ‘streamlined’ advice to be delivered at a lower cost.
Current regulatory requirements mean that financial advice involves a comprehensive fact-find on your personal circumstances, and individual recommendations based on your particular circumstances. This is one of the biggest selling points of financial advice – it is tailored to you, and based on nothing but your own best interests. However, it has been argued that this depth of service is more than some people want or need, at least in certain circumstances. The FAMR has proposed developing a framework for ‘streamlined’ advice (a sort of ‘advice-lite’) that helps consumers make their own investment decisions without considering their wider circumstances. There are potential problems with this (will advisers be blamed if the ‘advice-lite’ turns out to be insufficient?) but already there are circumstances in which it could be useful. For instance, some people are required by law to seek advice in order to transfer certain types of pension pot, even if they have already made up their mind. Streamlined advice might make this both easier and more affordable.
Problem: People need to feel more in control of their financial future.
Possible solution: Employers should be encouraged to support employees in understanding their financial health.
The best opportunity to plan for retirement comes some way in advance of it. People in employment are best placed to take positive action concerning their future, so the Financial Advice Working Group has been encouraged to work with employers to support employees in planning ahead. The proposal is for a guide for employers, promoting best practice and providing tools for employees to help them understand their finances. Employers would also encourage their employees to seek out financial advice, such as through unbiased.co.uk. It’s likely that employers will also be encouraged to subsidise financial advice for their workforce, perhaps as part of a benefit package.
On a similar issues, the Treasury may explore ways to improve the existing £150 income tax and National Insurance exemption for employer-arranged advice on pensions.
Problem: There is little alternative for those who never seek advice.
Possible solution: Broad ‘rules of thumb’ and prompts at key life stages to help people prepare.
A lot of people are not at all engaged with their finances, and would not seek out professional advice no matter how cheap it was. The FAMR therefore proposes the creation of ‘rules of thumb’ that people can follow, and prompts or ‘nudges’ that would prompt people to think about key issues at various stages of their life. A typical rule of thumb might be, ‘You can afford to take more investment risk when young, and less as you grow older.’ These prompts would certainly be better than nothing – but will people take note? That remains to be seen.
There won’t be a cut-off point on when you can complain to the Financial Ombudsman Service.
It was suggested pre-FAMR that a limit be imposed on raising complaints about financial advice – for instance, that you would have to complain within 15 years. The good news for consumers is that no limit has been imposed – given that the benefits and risks of some products may only emerge over the very long term (endowment mortgages are a good example), the FAMR has concluded that a limit is not in consumers’ best interests.
Watch this space for more detailed analysis of the implications of the FAMR report. And remember, you can find your most suitable and local financial adviser here at unbiased.co.uk.