Written by Chris McCullam on Tuesday 18 November 2014
A Mountain or a Molehill
Excerpts of a discussion between David Geale (FCA) and Louise Oliver (Adviser) recently highlighted a disconnect, if you see it that way, between the regulator and the coal-face of financial services. The discussion in question was around the ‘advice gap’ created by the RDR implementation in 2012 with Oliver claiming that “what we have is this massive gap of [people] who cannot afford to access advice and are left without life insurance, critical illness cover, no savings or pensions”. Geale’s reported counter was that “I’m not by any stretch of the imagination dismissing the fact that some people may not have access to advice. What I have not seen yet is anything that says how big or how small that advice gap is. Adviser numbers are not that different to where they were before RDR so capacity would not have changed that much”. I should point out here that I wasn’t in the meeting and my observations are based purely on what was reported in the press.
Unless a piece of regulation has happened without me noticing I understood that protection business was still available to be sold on a commission basis so the cost to the consumer for advice on life insurance or critical illness cover should be broadly similar to what it was 3 years ago and there’s no reason why that sort of advice can’t be offered ‘free’. I also don’t think that the term ‘advice gap’ should be applied to people who have no savings or pensions – that is a very different gap altogether. Whether adviser numbers are not that different is a questionable statement, it depends very much on what you define as an adviser given the high profile closing of many bank ‘advice’ arms over the last few years but if you treat it as a typical Independent or Restricted Financial Adviser then it does suggest the capacity is still there, or that advisers are actually struggling to offer the level of service they charge for to the number of clients that used to be on their books. In any event, how big is this advice gap?
Counting the money...
The ONS Wealth and Assets Survey 2010-12 breaks the c24m households in UK into quintile groups (fifths to you and me) based on gross income (from earnings, the state, pensions and investments) and then further classifies types and amounts of wealth as per their nice graphic.
Chart 1 - Infographic provided by Office for National Statistics - Distribution of household net financial wealth, by total household income quintile: Great Britain 2010-12
On average 75% of wealth is in Pensions (private and occupational) and Property with somewhere around 10%-15% in ‘net financial worth’ (savings, investments, cash under the mattress less credit card, loans, etc.). The ONS break this net financial wealth into chunks, see Income Quintile chart. Living costs what they are I’m only going to look at the top two income quintiles which represent households bringing in more than £40,000 per annum.
If we discount any households with less than £5k of net financial wealth (I think most advisers would suggest clearing debts and maintaining a cash emergency fund) and those with more than £100k (they aren’t in Martin Wheatley’s radar of concern) then that leaves 4.5m households who could be standing on the edge of the gap. About 2.6m of these households have £25k-£100k available for investment, and typically only the top end of that bracket have been the target of advisory firms. FCA figures put the number advisers at around the 26,000 mark which would give each adviser about 100 households to look after, not an unachievable number. However, none of these numbers consider pension wealth and the advice needs there or the 2.8m households (regardless of income level) with over £100k of net financial wealth, which would suggest that if there was an upsurge in the demand for advice the supply of advisers might struggle to cope.
Cantilever, Suspension or Bridge to Nowhere?
Simplified automated advice is the shiny new vision from the FCA to bridge the advice gap and meet a hoped for increase in demand. For the 5m households with sub £25k the bridge feels like one leading to suitable fund choices for the NISA allowance and an emergency cash stash – something that a simplified advice process should be well able to solve.
Building that first bridge and encouraging people across it is the challenge.