In this blog, Chet Velani, Managing Director at EV, explores the complexities and future prospects of the FCA's 'simplified advice' in the financial industry. Discover how technology, omnichannel experiences, and affordable solutions can empower individuals to achieve financial security and learn how EV's innovative approach can help advice firms provide enhanced services, streamline processes, and cater to a broader client base.
Last November, the FCA published a consultation on simplified advice, the concept being to make it easier and less costly for firms to advise consumers on a small number of mainstream investments. As part of this mooted regime, the FCA is looking at creating a new handbook definition of ‘core investment advice’, which could be delivered at lower cost by advisers who’ve achieved a lower level of qualifications than top-table advisers. The regulator is currently focused on limiting the regime to advice relating to investments held within a Stocks & Shares ISA so that the tax implications for investors are kept as simple as possible. Underlying all this is the intention to help more people in the UK invest for their future financial wellbeing.
I have some thoughts on whether this FCA initiative is good for consumers and the advice sector. First, I’m all for investigating and exploring avenues to help many more people to save for their future prosperity. Still, the most effective way of doing this isn’t the easiest topic confronting the industry.
The regulator’s idea is that people with between £10,000 and £20,000 of saved-up cash would be candidates for this simplified advice, helping them do better than leaving it in accounts earning little interest. The FCA has identified nearly 7,000 potential firms that could adopt this approach, but they only expect between 10 and 100 to proceed. That is telling.
Think about traditional adviser firms. Given the cost of providing advice, the average minimum investment amount they're geared to advise on is circa £50,000 (some won’t consider less than £100,000). So, considering the regulator’s focus on people with a maximum of £20,000, it isn’t easy to see how such advice firms will take simplified advice on board. It just doesn't stack up for them from an economic perspective.
On the other hand, organisations such as banks, life and pensions companies, and providers operating in the workplace can access large numbers of customers and communicate with them periodically about financial matters – whether online, in branches or in work settings. For them, it's feasible to set up a mass market type of solution here, similar to what we had pre-RDR, so we might see quite a few of these organisations return to this type of advisory space.
Then there are those companies going down the digital solutions route. Larger providers looking at implementing a fully digital advice process or a hybrid approach involving a human touchpoint when required should also benefit from the regulator’s push because this should allow for a simpler digital investment journey to be built.
Again, this would encourage consumer engagement and nudge individuals to complete the process. We already know that providing a digital or hybrid solution costs far less than the traditional advice pathway. So, simplified advice is more likely to work for big institutions and those involved in digital and hybrid implementations. But I really can't see many traditional adviser firms taking this up.
It feels like a natural step for large providers such as banks to implement solutions focusing on specific products, such as the Stocks & Shares ISAs the FCA has in mind. But a solution like this has a wider benefit because the FCA is trying to help individuals do better with their money. There's a vast number of people out there who have sums of money in cash that are eroding, given the way inflation is going and will likely continue. Many of these individuals will probably not seek financial advice for several reasons.
So, anything we can do to get people to obtain financial advice can only be good – we all know an enormous advice gap is in play. So the question for me is, what can we do to help individuals enter the ecosystem of receiving financial advice?
Ultimately, what can be done to reduce the cost of providing advice can only be a good thing long term. So, the simplified advice concept is a start. However, it’s only part of the solution, and we know the FCA is looking at other spaces, such as the boundary between guidance and advice. So coupled with other regulatory initiatives in the offing, it's a positive step, even if a small one.
A bigger part of the answer would be deploying technology to lower the cost of providing and receiving advice. As the regulator’s proposed simplified advice regime is quite restrictive, i.e., only S&S ISAs and a £20,000 maximum investment, there are no regular contributions and no ongoing advice element. So, it's a very specific journey. But this still leaves a significant advice gap problem. According to the Lang Cat’s “The Advice Gap Report 2023”,
Around 6.5 million individuals seeking advice are currently priced out of the market in the UK.
Decisions at the point of retirement, in the age of pension freedoms, is a key area where many people need support but aren’t getting it.
People these days can make complex irreversible decisions at the point of retiring. The FCA’s data tells us that in 2021-22, 700,000 pension pots were accessed, where two-thirds of individuals did so without receiving any advice. That just feels like a ticking time bomb to me – people making major decisions on pulling out money and drawing down at withdrawal rates that are not sustainable. But the reality is that many of these individuals can't be supported by the current advice processes because, for firms, the cost of providing advice doesn't make sense given the small pot sizes involved.
The alternative? It’s got to be moving to digital or hybrid solutions, where you're ultimately using technology and algorithms to give a recommendation or perhaps a suitability report and limiting the use of advisers to the areas where they can add value, such as building relationships and explaining results. An efficient process can be created in this way, and at EV, we are working with institutions to implement these less adviser-intensive solutions.
And with some of the solutions, we've seen that a fully digital journey can reduce the cost of advice by 90% compared to traditional advice. With a hybrid solution, blending digital processes with the human touch where called for, the cost reduction can still be as much as 50% to 60%.
Unless we start looking seriously at areas like this and developing more automated and digitised solutions, I struggle to see how many individuals in this country who need help will get that help. However, it’s surely only a matter of time before progress comes, and we're now seeing large financial institutions exploring how to combine various channels together across guidance or execution only, digital, hybrid and traditional advice.
To be clear, this is about more than replacing advisers, who remain a big part of advice provision. But I think hybrid is the direction we’ll go in. Over the last five years, we've seen some instances in simpler areas, such as ISA and GIA advice, where it’s more straightforward. Still, we’re also starting to see it in other areas like protection and advice at retirement and in retirement. As the industry starts moving towards reducing the cost of advice and improving efficiency, this can only be a good thing for UK consumers. Small steps but good moves in the right direction.
Every year that goes by, people of all ages are increasingly comfortable using technology such as online banking and smartphone apps – so we've got to develop these advice-based tech solutions, get them out there and get people using them. Where institutions already have access to a large customer base, for example, banks, life companies and providers in the workplace, this can be leveraged to take customers smoothly through an advice process.
We’re already seeing financial institutions starting to ask how they can support their customers better – and it might not be advice.
Instead, it could be guidance or educational enlightenment. So, it’s evolving into an ‘omnichannel experience’, where there are avenues available for traditional advice, guidance, education, or some degree of digital and hybrid advice based on the individual’s needs and the level of assets they have. In this ecosystem, providers truly put the customer first and focus on a solution that works for each person.
I’m quite excited about where the industry will go over the next five to ten years because things are happening. Tech will inevitably play a big role in getting people to financial security in later life.
Yes, we have a real problem with the actual cost of advice and engaging people currently unadvised. While firms can rely on high net-worth clients with sufficient assets right now if you look 10 or 20 years into the future, will people have pot sizes like today’s DB pots?
So, thinking about auto-enrolment pots and their size moving forward and whatever savings people will have, there’s a real question of how we can support these individuals if we can't get them more support at a lower cost.
Whether this means providing some regulated guidance, or a cheaper advice process, we must look at ways to deliver more simplified journeys across several areas. Starting with something simple like a Stocks & Shares ISA is the easiest place to progress from. But we should simplify advice processes in other investment areas too. I see it as a fantastic opportunity because, ultimately, simplified advice does lend itself well to a digital advice process – because you're essentially focusing on a particular need area. Traditional adviser firms and holistic advice can be helpful when you want to consider more complex areas, taking more than one thing into account. And that will always be there to help individuals who can afford it. But for those thousands who can't afford it, given the current price point, we can and must do things differently.
Even the FCA themselves have accepted that the simplified investment advice is not straightforward and will require some further work, so “they’re going back to the drawing board” to consider a different approach as it looks ahead to the advice guidance boundary review.
Still, EV is pressing ahead with digital and hybrid developments. This is good for those unadvised now, it’s good for institutions that can better serve the needs of their large customer base, and it’s good for advice firms who know in their bones that the next generation of clients will have fewer assets and need to be advised at a lower cost per head while still generating profitable business.
At EV, we can demonstrate how embedding the right tech can help advice firms build a low-cost mass-market proposition while remaining profitable, with efficiencies arising from not requiring more hands on deck when scaling up. By implementing a spectrum of advice capacities – adding digital and hybrid models to traditional face-to-face full service – the firm can be transformational in providing more value and consistently creating better outcomes for more people while enhancing business performance, market competitiveness and mutual prosperity.
You can book a discovery call today to learn how EV can partner with your firm to enhance the advice journey and give your clients the quality and depth of service, support and information they expect today and in the future.