The Guidance Gap - An investigation of the UK's post-RDR savings and investment landscape
In 2006 the Financial Services Authority (FSA) launched the Retail Distribution Review (RDR) to reconsider the way in which financial advice is provided. A major recommendation was that independent advisers should charge an explicit fee for their advice. This research looks into the willingness of UK retail savers and investors to pay for financial advice, and the implications for the large number of people research suggests would be unwilling.
Arguably sound finances are as important to our well-being as sound health. In 2006 the Financial Services Authority (FSA) launched the Retail Distribution Review (RDR) to reconsider the way in which financial advice is provided to retail investors and savers. One of the main goals of this review was to identify ways of improving the quality of this advice which, if successful, would in turn help to improve the quality of our personal finances.
An important conclusion of the RDR was that professional independent advisers should no longer be paid for their advice by product providers via commission arrangements. Instead they would need to charge their clients an explicit fee for their advice. The FSA's intention in moving independent financial advice away from the commission-based model was to elucidate not only the cost of financial advice but also its value. This new, fee-based framework for the provision of financial advice began on 1st January 2013.
The move to a fee-based remuneration model raises an important question: will UK retail savers and investors be willing to pay a fee for financial advice? Based on a survey of 2,060 people, representative of the UK's adult population, our survey indicates that only just over 7 million people are 'likely' to be willing to pay a fee for financial advice. Although of course, many people did not make use of financial advice prior to the RDR changes, we nonetheless find that 26.5 million people across the country, say that they are 'unlikely' to pay for financial advice.
Given that there is likely to be a large number of people that will not be serviced by professional financial advisers in the RDR world, we explored the possible role that 'financial guidance' could play. By guidance we mean a resource that would provide people with all of the information they would need to make investment and savings decisions on their own. Such guidance could be provided by, for example, large employers for their employees, by the finance industry, by independent web-based companies, or indeed by financial advisers.
In the course of this research we have identified a financial 'guidance gap'. This gap comprises those people that will be without professional financial advice in the RDR world and that will not have the confidence to make their own decisions in the absence of professional advice but who, nevertheless, will be in need of financial guidance in order to maintain the health of their personal finances.
In aggregate we estimate that the total investible wealth of the 43 million of the UK's adult population that will fall into the guidance gap is approximately £440 billion. We also estimate that people in the guidance gap currently save a total of £54 billion every year.
Of course the RDR revolution has only just begun and the full impact of the changes that took place at the start of this year have yet to be felt. We believe that it is very possible that more people could fall into the guidance gap over time. This is because up to a half of those people that say that they would be likely to pay for financial advice in the future will probably either be unwilling to pay the likely fees that an financial adviser will need to charge or will not have sufficient assets to make them attractive to professional financial advisers.
Furthermore, a number of senior industry figures believe that the requirements of RDR, with regard to adviser qualifications, and the end of the commission-based remuneration arrangements, may lead to a substantial fall in IFA numbers, which may in turn make it harder for people to find a financial adviser.
The FSA's goal may have been to improve the average quality of financial advice, and the RDR may well achieve this aim, but at the same time it seems likely to us that both the demand for and the supply of financial advice are likely to shrink as a consequence of this new regulatory regime. Without a commensurate increase in the supply of high-quality guidance, the quality of personal finances in the UK is unlikely to improve.
The full report can be downloaded at the link below.