The financial advice gap has been exacerbated by low interest rates, according to Andrew Bailey, chief executive of the Financial Conduct Authority (FCA).
Speaking at Mansion House, Bailey noted that while the banning of financial adviser commission fees in 2012 had largely been positive, it had contributed to a gap in financial advice. However, the gap he argues has been made worse by low interest rates.
He was, he said, ‘quite prepared to recognise that there are concerns about a gap in the advice market,’ referring to the concern that new financial advice rule changes from 2012 had resulted in members of the public going without adequate professional financial advice for managing their savings and investments.
The new rules, brought in under the Retail Distribution Review, banned commission fees for financial advisers. This meant that advisers could no longer gain commission from fund managers for selling a financial product to clients but instead had to rely on explicit fees from consumers.
While, as Bailey noted in his speech, this has had some positive affect on the industry – including increased professionalisation and greater levels of transparency – it has not been without its costs.
Since the rule change financial advisers have become less inclined to work for smaller clients, those that have pot sizes worth less than £100,000. Given that most advisers charge a percentage of a portfolio’s value, small investment pots mean small profits. This, and the fact that financial advice is relatively expensive for those with small pots, left small investors short of advice options.
However, according to Bailey, while the banning of commission has played a role in creating an advice gap, it has been exacerbated by low interest rates. He noted: ‘I think that gap is robably exacerbated by low interest rates, which mean that the cost of advice looks less favourable when compared to returns.’
According to Jason Hollands, managing director of Tilney Bestinvest, there is truth to this: ‘A near decade of abnormally low interest rates have also had a profound impact on savers and investors in so many ways, including shrinking purchases of annuities whose guaranteed income streams are heavily linked to gilt yields which in turn are sensitive to interest rates.’
Therefore, says Hollands, ‘it may well be the case that some investors are under the impression that advice is too costly given the low returns on offer. In many cases that would be a worrying misconception as in a low return world, making the right decisions is more important than ever.’
To fix the problem, Bailey said, the FCA is doing two things. First, it is attempting to bring more innovation to the financial advice industry to improve and increase the supply of advice.
The FCA is also working with the Treasury, in carrying out a review of the industry to ‘explore ways in which government, industry and regulators can stimulate the development of a market which delivers affordable and accessible financial advice and guidance to everyone, at all stages of their lives.’
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