Regular readers of Informed Choice blogs will know that we have written many times about the Retail Distribution Review (RDR) and the benefits that regulatory change have bought about.
Better qualified financial advisers all signed up to common professional standards in order to obtain their Statements of Professional Standing and the abolition of commission on investment and pension products have been much debated.
But as with all change the RDR has not been without some unintended consequences.
One of those is the ‘advice gap’.
Put simply many advisers find it commercially difficult if not nigh on impossible to deliver advice to those members of society who are in the accumulation stage of their financial lives.
Historically the advice to such people was generally bundled up with a recommended product solution and that product solution would generate a commission payment to the adviser to pay for the service delivered.
A structure of cross subsidy also supported this advice delivery with larger sums of commission generated by more substantial savings and investments being used to part pay for delivery to smaller savers and investors.
The abolition of commission has also removed this cross subsidy and potentially therefore an advice gap had been created.
I say potentially because at the moment the evidence is mainly anecdotal, although that is not to say it is wrong.
Leaving aside the fact that we are not in favour of cross subsidy – it seems to us that each client should fully pay for the services that they receive – and that most of our clients are not in the accumulation stage of their lives, the advice gap is a significant problem for the regulator to deal with.
After all one of the key planks of the RDR reform was about making financial advice accessible. It is possible that the complete opposite of this has actually been achieved.
The High Street banks used to be a significant source of “advice” but they are pretty much now a spent force.
I use the word “advice” guardedly because most independent financial advisers would argue that advice was not what the banks delivered, instead it was mostly about selling products based on sales targets.
True or not it seems that post RDR most retail banks have ceased to be providers of financial advice.
There may have been some hope that any advice gap would have been filled by new distribution mechanisms, for example the Internet, but perhaps it is too early to say if this is likely to happen or not.
We also have to be mindful that pre-RDR only a very small percentage of the population engaged with financial advisers and that the typical cost of that engagement was quite high.
The Association of British Insurers some years ago identified that the average cost of getting advice about investing on a regular basis was around £661 still a significant amount of money albeit paid through commission.
So the key adviser challenge has been about determining whether they wanted to focus their business on those who had already accumulated some wealth that needed managing or find a way of continuing to serve the accumulation clients they had dealt with in the past.
The former seems to have been less of a challenge than the latter.
I suspect that there is an advice gap.
It has been created by the unintended consequence of the RDR and it really is now down to the regulator to do some soul searching and come up with solutions – perhaps even as radical as the reintroduction of commission on regular contribution investment and pension plans.
