Advice gap - myth or reality?

Richard Rattue, Managing Director, Compli-Serve SA.

It is hard to open an industry publication at present and not see the acronym RDR staring back at you. This is of course wholly expected as the Retail Distribution Review (RDR) is possibly the most comprehensive restructuring of the financial services industry in a generation. This wide-ranging review is set to examine all remuneration models and will undoubtedly cause the landscape of the financial services industry to shift once the recommendations are finalised and gazetted.

As with all great changes, there are both intended and unintended consequences as a result of such change. One of the consequences that has been subject to some debate, is the phenomenon sometimes referred to as the “advice gap”.

The advice gap refers to, for example, introducing advisor charging and therefore a possible move away for advisors from the less affluent market. Similarly, consumers may move away from advisors if they are unable to afford advisor charging, do not require full financial advice, or feel competent to manage their own affairs and begrudge paying for advice.

A report undertaken by Deloittes which looked at the pre-RDR environment in the UK found that 87% of customers who purchased a savings/investment product via a bank advisor in the previous three years assumed the advice process was "free"; 24% would be less likely to visit a financial advisor if they had to pay a fee; and a further 32% of customers would be likely to do their own financial planning, product research and administration to avoid using an advisor. Furthermore, the survey showed that most large IFA firms were looking to channel resources towards customers with at least £50 000 in investable assets.

The concern therefore lies with the individuals who fall below the threshold into the demographic termed as “wealth-poor”; i.e. those that have savings and financial means but not sufficient to require full financial planning and would likely opt for a lower cost advisory interface, or indeed shy away from advice completely.

It is of interest to note that the UK Regulator vehemently denied that RDR was responsible for an advice gap; however, numerous studies from reputable firms have pointed a finger towards RDR, which perhaps may not have created the advice gap, but at least acted as an effective accelerant to a process that was already underway.

Of course, opportunity exists if one has a large number of individuals who have money to invest, and indeed a need for financial guidance, yet are unable to pay for the professional services of full financial advice. I am sure we will see a resulting growth in low advice/no advice product sales for those who are no longer economically viable for professional IFAs or the larger advisory firms who will need to cover higher overheads and inevitably migrate away from the wealth-poor market and rather concentrate on affluent and mass-affluent sectors.

In our local jurisdiction, the primary legislation governing the rendering of advice is of course FAIS. However, it does not speak particularly well in respect of low/no advice sales. It is likely that the revised version of this legislation in whatever form it takes, will need to address the no-advice sale in more detail than is currently the case, as it would appear almost certain that there will be a growing market for such services.

The FSB has said they are aware of the advice gap and will seek to ensure that its impact on consumers is limited.

From my perspective, the advice gap may not necessarily be a bad thing as it will simply give rise to different delivery models which do not necessarily mean that the quality of advice will be compromised; however, of course it is open to abuse and I therefore expect tighter regulation around the low-advice models will emerge.

We remain some time away from the implementation of the RDR proposals and currently await the FSB feedback on the initial RDR paper. Once these are received, we will then be able to get a clearer indication of where the Regulator wishes to take the industry and its impacts on the current industry models around the advisor space.

I for one, will watch developments with interest.