Regulators don’t understand financial advice

Posted by TEBI on December 19, 2022

Regulators don’t understand financial advice





Financial advisers and consumers are on a steep learning curve. The advice profession is changing beyond all recognition. But can financial regulators keep up?


It’s just not the very wealthy who need good financial advice; everyone does. The UK regulator, the Financial Conduct Authority, should therefore be applauded for trying to give a wider cross-section of the population access to it. The problem is, it’s chosen a very strange way to go about it.

The FCA recently announced a consultation exercise — yes, another one of those — on proposals for a new regime covering what it calls “core investment advice“. The aim, it says, is to “deliver a consumer investment market where people can readily access support and firms aren’t deterred from providing it”.

In particular, the FCA is proposing to streamline the customer “fact find” and limit the range of investments to make the advice is easier to deliver and understand; lower the qualification requirements to reduce the cost for businesses; and allow advice fees to be paid in instalments so customers aren’t burdened by large bills up front.

The regulator says it particularly wants to help the estimated 4.2 million people who have more than £20,000 in cash and are open to investing some of it. It rightly points out in its press release that consumers who hold significant amounts of excess cash may be damaging their financial position, as inflation reduces the value of their savings.


A watershed moment?

The proposals were broadly welcomed by the investing industry. Interactive Investor, for example, declared it a “watershed moment”. Hargreaves Lansdown was positive too.

I’m sorry to sound a negative note, but I’m hugely unimpressed by this initiative. In my view, it’s unlikely to improve financial outcomes for the wider public; in fact it only serves to emphasise the total mess that financial regulation in Britain has become.

Once again, I’m afraid, the FCA is behind the curve. Interest rates have risen sharply in recent months and, for many people, moving most of their cash savings into equities may not be the best thing.

Another problem is that the new regime is only expected to cover advice on on stocks and shares ISAs. Why not include pensions? For some people, investing any extra money in a pension may be a better option, and the obvious temptation for an adviser who is only qualified to advise on ISAs will be not to point that out.

Nor will core investment advice cover insurance. Again, there’s a potential conflict of interest here. Saving and investing every available pound might well be a bad idea for those who aren’t insured against a life-changing accident or critical illness. Surely that should be included in any sensible definition of simplified advice?


Regulators are too focused on product sales

But my biggest reservation about these proposals is that they appear to be less about giving consumers the support they need than helping providers of expensive investment products to sell their wares.

Why? Because the profit margins on advising people on investing modest sums are so small that most independent financial advisers simply won’t be interested. The only ones who can really make this work financially are large, vertically integrated businesses that charge customers for advising them to invest in their products.

Mike Barrett at The Lang Cat put it perfectly when he said: “This isn’t about broadening access to financial advice; it is about selling. Advice isn’t the product here; stocks and shares ISAs are.”

The truth, sadly, is that financial regulators have always been much more focused on product sales than financial advice. It dates back to a time when sales and advice were effectively considered the same thing. But, as any good adviser knows, they’re not; in fact, sales and advice are diametrically opposed.

We shouldn’t be surprised at the FCA’s stance. Regulators have been subjected to relentless lobbying from product providers for more than 40 years. The’ve been conditioned to think that asset management is where the true value lies and that advice is mainly about directing consumers towards the “best” funds.

That is, of course, a total myth. Active money management doesn’t add any value for consumers at all; after costs, it extracts value. Most people are better off using low-cost, highly diversified that simply track the global markets.


Advice is where the value lies

Regulators need to understand that he most important link in the value chain is the financial adviser. And good advice has nothing to do with flogging ISAs.

It’s time for advisers to make their voices heard and do some concerted lobbying of their own. They can start by responding to this latest consultation and telling the FCA how misguided its proposals are.



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