You have £20,000 sitting in an account, being eroded by inflation. What to do?
As things stand, getting any professional advice on how to invest that sort of sum would not make financial sense. The fee would either be too small to cover an adviser’s costs or too high for the consumer to bear.
That is the so-called ‘advice gap’.
The Financial Conduct Authority wants to close the advice gap. The plan is that the roughly 4.2mn people in the UK who are holding more than £10,000 in cash, and open to investing at least some of it, should be helped to do so by professional advisers.
The FCA is now consulting on:
- making the qualifications for providing simplified advice ‘proportionate’ – which should cut the cost of providing that advice;
- making investment advice in the new regime easier to provide and to understand;
- letting clients pay fees in instalments; and
- limiting the range of investments in the new regime so that it is easier to provide and to understand the advice.
Will it work?
Yes. This is a milestone in opening up financial advice and will finally provide ordinary consumers with a bridge from cash into assets.
If that sounds far-fetched, what we should not forget is that streamlined and simplified advice is not the same as dumbed-down advice.
Advisers have a duty of care and the upcoming rules on the consumer duty will explicitly require all financial services firms to “act to deliver good outcomes” for retail customers.
The proposed changes are also good news for the advisers themselves.
Currently, an IFA needs the same level of training whether they are advising on £10mn or £10,000.
It makes sense to allow a shorter route to advising on simpler financial affairs, particularly when it is proposed that the investment advice will be limited to a narrow range of products within a stocks and shares Isa.
Finally, we should not forget that a significant part of the value of advice is not the technical knowledge but the objectivity an adviser brings.
When the average retail investor makes investment decisions about their own money they are driven by emotion – the so-called ‘disposition effect’ that means people tend to ‘buy high, sell low’ and trade actively – and, so, make losses over time.
There are, of course, low-cost robo-advisers that can be set to make very rational, long-term decisions. In 2020, the FCA found that total annual fees – covering both advice and investment charges – were around 0.8 per cent for robo-advice.
Qualified in-person advice costs considerably more. Which? reported at the end of November 2022 that setting up a £20,000 Isa and receiving ongoing advice about it would cost between £1,000 and £1,920 over five years.
The advantage that in-person advice has over the machine is the ability to find out what the customer does not know, or understand, and to explain to them the things they need to know and understand.
Just as importantly, a face-to-face discussion means more vulnerable investors can be recognised and supported.
A machine cannot factor in signs of emotional distress, like distraction or sadness.
A human being, on the other hand, can realise that the money to be invested might be the result of a redundancy payment, or a bereavement, and ensure that the client is protected accordingly.
