The gap in Britain’s financial advice market might be likened to the often disturbingly wide space between London’s Tube trains and station platforms. The only difference between the two is the advice gap is growing wider.
The issue appeared a decade ago, when the regulator, then called the Financial Services Authority, devised the Retail Distribution Review.
The aim was to stamp out the long-held practice of financial advisers receiving commission from the investment companies whose products they were selling. Instead, advisers would have to charge customers fees upfront.
Although this rule brought much-needed transparency to the advice sector, it meant customers generally faced higher charges over a lifetime. Suddenly, financial advice became less affordable.
As a result, people who have actively sought some form of direction largely fall into two camps: those who are able and willing to select their own investments through execution-only platforms, with some “guidance” in the form of literature and best-buy fund lists; and those who have the time and money to afford full-fat financial advice from an independent financial adviser.
But what about the millions of people who have fallen between the cracks, those who need more help than a little guidance but require less expensive services than those offered by an IFA?
That underserved market, or gap, has grown and is getting wider. Research by Intelliflo, a financial advice software provider, found that 73 per cent of IFAs believed it had expanded over the past five years.
Yet 20mn people — or 39 per cent of adults — feel they would benefit from free advice but are unaware of, or are unable to access, free services, according to a survey by financial platform OpenMoney. About 6mn are willing to pay for advice, but believe it is too expensive. The cost of living crisis and soaring inflation has arguably made the need for affordable advice even more acute, but also placed it further out of reach.
What has the watchdog done to date to address the issue? Not a huge amount. There is hope on the horizon, though: the FCA launched a consultation at the end of last year on making advice simpler and cheaper for customers looking to invest through their stocks and shares ISA (which it wants to wrap up by the spring). It is a step in the right direction, only about 10 years too late.
In the meantime, investment platforms are taking matters into their own hands. Or rather, perhaps they sense the opportunity.
Hargreaves Lansdown, the UK’s oldest investment supermarket, has been selling funds and financial products since 1981. It is “execution-only”, offering some guidance in the form of product literature and a list of their preferred funds.
But now the platform, which has some 1.7mn customers, has devised a (vague) plan to offer a little more guidance that is personalised and more affordable for individual customers, without straying into “advice” territory by making a personal recommendation. This would require a financial adviser and would involve a costlier, more time-consuming process.
Details of the FTSE 100 company’s plan should come out next month. So far, one of the aims is to provide customers with alerts on their phone app telling them about, for example, the amount of spare cash they have that could be put to work in an investment ISA. They could also end up providing cheaper financial advice for those who need the extra help, although it’s not yet clear how much they would charge for this service.
The opportunity for Hargreaves is that they funnel more people’s cash into investments on their platform. Whether a nudge on an app can achieve this remains to be seen. The risk is that customers are led into investments that are more than they can stomach, which could lead to potential mis-selling claims in the future. Last week, the supermarket’s co-founder Peter Hargreaves warned that straying into so-called hybrid advice territory would be a bad move for this very reason.
The ambition to plug the gap is laudable, but ultimately, it is restricted by the lack of clarity around regulation, limiting the platform’s ability to offer more meaningful financial assistance and potentially exposing both the company and customers to more risk.
Until the FCA provides further detail, such companies will be unable to properly address the issue and customers going it alone will have to take a leap of faith when it comes to managing their money. “Mind the gap,” Underground stations warn in announcements — the regulator should start minding too.