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So the white noise continues with industry commentators all sundry providing their views and penny’s worth on last week’s HMT/FCA joint publication of the Financial Advice Market Review – FAMR. As a contributor to the FAMR call for input and with a number of our recommendations included in the report, our blog provides our view with links to some of our research and commentary.
The outcry against ‘Robo-advice’ is misguided: The fact that the Americanism ‘Robo-advice’ would never sit well with the UK particularly when we struggle with the very definition of advice, means that we have the adviser community crying ‘not fair’ in the belief the FAMR comes down favourably with automated investment services and the banks as a solution to the massive passive unadvised market. In reality, what we have is ships in the night, particularly for those adviser firms who have segmented their client banks with care. Clients who are more tech and DIY orientated will generally be pleased to go for the online services. Those who are delegators will want to continue to enjoy the human touch.
Who wants to be a millionaire? Our research showcases those savers who want online services will want to ‘phone a friend’ at some stage in the advice (or guidance process) something the FAMR paper also confirms. This is good news for the adviser community, one that offers an opportunity for those firms willing to adapt their advice models and deliver a streamlined ‘Cyber’ advice strategy something the paper outlines.
Walk like a duck: Creating boundaries across guidance and advice can only be a good thing. By defining advice as we did in our blog if it looks like a duck then we can understand that there is also a place for information and guidance services and this can facilitate good consumer outcomes by educating the public and gain consumer informed consent as to understanding the difference between information, guidance and advice.
Nudges, steers and heuristics are in: At Engage we’re big on applying social science to the client service proposition and this is something the FCA picked up on back in 2013 when it launched against a backdrop of behavioural economics. Yet this is where most FAMR industry commentators exhibit their blind spot, as there is a crying need for coaching clients (whether online of face to face) through their financial journey. By definition coaching means a process of support where a learner achieves specific personal or professional goals. By recognising emotion as a key protagonist in the financial planning journey and applying coaching techniques to guidance and advice insistent clients can be dealt with effectively and efficiently. Whether through technology or human engagement, the industry needs to embrace the touchy feely holistic lifestyle coaching processes and strategies that can be defined as soft skills and techniques. With Artificial Intelligence around the corner, the FAMR can pave the way for the industry to now engage clients with technologies that offer behavioural economic techniques such as cash flow apps that nudge action around life events and the much coveted pensions dashboard to provide a consolidated reference tool to aid clear understanding of the current position and implications for future action.
Indeed, smarter communications, financial health checks and simpler suitability reports mean that consumers should now be able to digest documents with ease, which are salient and streamlined thus easier to understand.
Finally, rules of thumb otherwise known as heuristics means that consumers can be given examples that provide benchmarks for their financial planning. We would argue this also should be applied to firm best practice i.e. the Financial Ombudsman Service (FOS), Professional indemnity insurance providers and the Financial Service Compensation Scheme (FSCS) risk-based levy all could have benchmarks of best practice as reference to assess risks.
Professionalism is the standard: QCL4 is the minimum qualification to provide advice and the FAMR thus cements the RDR’s professionalisation of the industry. With a relaxation on the time taken to reach diploma level this is great news for those firms nurturing new talent within the industry. With the average age of financial advisers now mid to late 50’s, and generation Y starting to think about heady issues such as starting families and property purchase and demanding technology as an integral part of their financial planning, we see the need for new blood to come through and service a new kind of client profile.
The European Securities and Market Authority (ESMA) alignment to MiFID II’s advice staff knowledge and competence standards and the UK Government’s proposals on extending the Senior Managers Regime to all FSMA authorised firm’s means both personnel and the firm itself will be held accountable to the highest standards of professionalism. Therefore the industry needs to build on the good work for individual professional standards and apply this to the firms i.e. it’s not just about qualifications.
The Yeti Exists: As we have seen from point 1 FinTech is poised for incredible growth within the industry. The FCA sandbox with its safe harbours i.e. restricted authorisation, non-enforcement action letters and individual guidance the proposed FCA advice unit could facilitate firms developing genuine automated advice models. This along with client portals and online fillable fact finds will mean a simplified advice model can work as we predicted in our blog The YETI exists.
Open data and the open application programming interface (API) initiative means that the industry can move to a place where data share standards allow movement of data across technology making it easier for business models to employ technology that talks across the value chain and clients to access their data. We’re already seeing this for the aforementioned client portals and the desired pension dashboard would go along way to provide consolidated and aggregated data systems.
A personalised price of advice: At our November IoD Symposium, Steve Webb discussed the fact that Pension Wise could have been like wine tasting i.e. once tasted consumers would buy into advice as the next step. Indeed an advice voucher system has been touted. At the end of the day, and as our book Winning Client Trust showcases, this comes down to one issue, that of value. If advice is positioned as an accessible and valuable commodity then it will be purchased indeed technology plays a key role, but so does the human touch and there will be consumers who would much prefer to meet and great before making a financial decision.
With the current adviser charging rules allowing payments by instalments and with professionalism in mind i.e. a need to move away from product based charging, we would argue a case for affordable retainer fees to become an industry norm for adviser charging.
Using centres of influence: The workplace and the role of employers is crucial in supporting employees financial capabilities, auto-enrolment is the obvious example. But so is the education sector and in particular schools. If schools are targeted as a first point of contact for financial education (which Martin Lewis and PFEG are doing) then this will have a knock-on effect with parents. Banks are also offering Life skills workshops and The Prince’s Trust enterprise programme also offers financial advice support for business, thus by empowering such centres of influence with tools, techniques and regulatory direction, we can begin to see a self-directed, myth busting movement towards self-empowerment can begin to take hold.
The IKEA effect: Ever wondered why IKEA is so popular? It relies on the psychological attachment or ‘sweat equity’ effect when you build their self-assembly furniture. With point 2 in mind, Robert Thaler the co author of Nudge incorporated one of his core findings into President Obama’s economic policy called endowment theory: People ascribe more value to things because they own them. This means that if financial products are co-built with end user needs in mind, then there could be more value attributed to them. In this regard, the suggested annual access to pension plans to pay for advice could work. Indeed our own research tells us that savers and investors find such product features that offer flexible access and fungible benefits very attractive indeed.
So, much to be excited about, but the industry needs to remain grounded in the fact that it has a duty to step up and provide a service to the mass unadvised and focus on applying professional standards and strategy to the organisation along with the individual.