Financial Advice Market Review

Financial Advice Market Review.

The Treasury and the finance industry regulator the Financial Conduct Authority (FCA) has this week launched a major review for the financial advisory market given that the costs of financial advice exclude people with lower incomes or no income or assets. Ultimately the topic is about making available affordable financial advice for all.

There is a huge savings gap in the United Kingdom. People do not save enough for their future. Likewise, financial advice is not always affordable for all.

Why is financial advice expensive?

• Financial advisers are required to have degree equivalent professional qualifications.
• Financial advisers are required to "know your client". This means that your financial adviser will conduct in-depth discussions with you about all areas of your finance including basic details, health details, employment, employment history, residence, domicile, income tax, mortgages, debts, capital gains tax, inheritance tax, investment risk, your needs and objectives, retirement goals and indeed what your plans are for care in later life. In short, your financial adviser cannot "cut corners".
• Once they have done this your financial adviser must then use their knowledge and research the whole of the market to find the best solution for you. This solution must be both suitable and affordable.
• Your financial adviser must also write a full suitability report detailing all their research and recommendations, this must be individual to you and cannot be a template report, it must be personal.
• Your financial adviser then arranges for any advice transactions to be carried out and completed (including application forms).
• Your financial adviser is also required to verify your identity under MLID (money laundering regulations) and certify to the investment company that you are who you are by seeing original copies of passports, driving licences, other proofs of name and address such as bills and invoices. These must be recorded.
• Your financial adviser then has to chase investment and pension companies to make sure that the work is being done.
• Your financial adviser then has to check that all of the documentation for investments, ISAs, pensions et cetera are accurate and as required.
• Your financial adviser then has an open-ended liability (technically for life) for the advice that they have given you.

In addition, your financial adviser usually pays tens of thousands of pounds each year to pay for:

• Financial Conduct Authority fees
• Financial Ombudsman Service fees and levies
• Financial Services Compensation Scheme levies (this is not paid for by the government like they make out)
• The free Money Advice Service levy (again this is not paid for by the government but paid for by the finance industry)
• Professional indemnity insurance to protect clients if the financial adviser makes a mistake
• Office costs, staff costs and then eventually they get paid.

No wonder financial advice is expensive and is not affordable for all.

The Treasury have set a target that they want to make financial services advice available to all people through all walks of life and at all stages of both their working career and retirement.  This is an admirable objective but as part of the Financial Advice Market Review they will need to make significant changes to regulation so that advice costs can be reduced or indeed the advice process simplified.

Comment

Fundamentally, financial advice is "red tape gone mad".

"Financial advice for all" is a must for the financial security of people today and in later life, but to enable us to deliver this, as financial advisers, there must be a change in the raft of rules, red tape and liability that we face to help us reduce costs, simplify delivery to you, our client and to protect both the consumer and the industry from those unscrupulous individuals (both industry and consumers too) who abuse trust and good will.

We suggest the simplest way to reduce the cost of financial advice would be to remove the "for life", open ended liability that financial advisers take on.

Every other industry in the UK is subject to the Limitation Act 1980. In simple terms, there is a time limit of 6 years to make a claim for negligence, faulty goods, workmanship etc. There is no "long stop" for financial services, the liability is open ended and as a result, regulatory fees, levies and professional indemnity insurances are astronomically and disproportionately high which mean the costs to deliver financial advice remain high.