Do not get me wrong, financial advisors provide a critical service. What they offer and how it is paid for results in limitations on who and how they can support them. This is borne out by a recent case in my own practice. A teacher in their early 40’s was involved in a serious car accident. The consequence was that they were unable to return to work. The great news was that they had previously been advised to buy an income protection policy. Kudos to the Financial Advisor who sold the policy. The policy started to pay the benefit. After 2 years the life company contacted the client advising them that as per the terms of their policy the benefit could now be reduced by the amount of any ill health early retirement that they were entitled too. In fact, they could reduce the benefit even if the teacher did not take ill health early retirement.
The above news caused some panic for the teacher. If they took ill health early retirement and at a later stage decided to return to the classroom, they would lose all their seniority and be treated as a new hire. They had over 20 years teaching experience. Given a reduced income could the teacher manage to live comfortably? Would they be forced back to work purely on financial grounds? What would their retirement income look like and would this be sufficient?
Traditional financial advisors are ill equipped and not incentivised to answer the types of dilemma’s this case raised. Their primary purpose is to represent product providers and place financial products into the hands of consumers. Yes, in the case above someone did a good job identifying the risk that a loss of income poses. They also provided a suitable product to meet the need and ultimately mitigate the client’s risk. But what now? Is the traditional financial advisor interested in solving the or advising on the current problem? Does the traditional advisor have the tools to consider cashflow, client feelings, or fears? If, they did provide advice how would they be compensated for their work without a new product sale?
It is this gap the financial services industry in Ireland needs to fill. Financial Advice needs to be available to people who have no need for a new financial product. The problem as it stands is it is far easier to focus on sales alone and only engage in client interactions that have the potential to generate a sale. In my career I have come across many situations where it is obvious that advice is required but that there will be no product solution required. What happens to these people? Where do they turn? Friends, family, or the internet. This can leave people in financial stress vulnerable to unscrupulous individuals.
Based on the above you may think I am a strong advocate of the reforms the UK’s introduced in 2013 called the Retail Distribution Review (RDR). I am not. The way RDR has been implemented has not resulted in improved financial advice services or broader up take in financial advice by the British population. Even though the FCA has heralded it as a success the data in their own report on the effectiveness of RDR reforms, and the introduction of the Financial Advice Market Review (FAMR) in 2015 published in December 2020 proved marginal progress. After 7 years and 5 years respectively only 8% of UK adults received financial advice in the last 12 months an increase of just 2% from 2017. Of those that had investible assets of over £10,000 only 17% received financial advice. It was 25% for those with investible assets between £100,000 and £200,000 and 38% for those with assets over £250,000. This I believe supports the notion that regulation cannot create or promote egalitarianism.
If RDR and the FAMR had success it was in the improved professionalisation of the financial community. This must be applauded. The next change is a cultural one where it is less about the money and more about helping clients live their best life possible with the money they have.
It is time the financial services industry in Ireland took control of its own destiny. The provision of objective financial advice must be the goal. Separating the advice from the product fees would clearly remove an obvious conflict of interest. Rather than let the Central Bank and politicians regulate this by way of an Irish RDR or similar an industry lead technological based solution should be developed. I envisage a web based open “fund platform” or “Fund Supermarket” where traditional sales commissions are removed. Consumers can access all available funds in the Irish market for a small uniform execution fee. To access the platform consumers must have an access code provided by either a regulated financial advisor or a regulated robo advisor platform. This will allow those who want to self-direct to do so. Those who want the benefit of a fee-based advisor also have access to the same low-cost execution platform. The code could contain indicators of risk preference, term, and the new sustainability criterion. It will then act as proof of advice and address the issue of suitability so important in our current regulatory system.
The real benefit of the above is to dismantle the aggressive 1980’s commission-based sales culture that exists in the provision of financial advice in Ireland. It will modernise the industry and deliver a system that places objective advice at its centre. The cost of advice will then be transparent. This I would hope could remove some of the general mistrust of financial advisors.
A further benefit is that wealth managers will then have to compete on annual management charges, performance, and customer service to name a few, as opposed to the level of incentive offered to salespeople and brokers.
Could a transformation of this type take place in current environment? I fear not. There are too many vested interests in maintaining the status quo. If the system worked perfectly for the consumer there would be no need to regulate and hence a much smaller role for regulators. Then what would they do. The Irish financial advisor community is getting very well paid under the current system. Yes, they adhere to standards and fill a niche but so many consumers are left underserved. Many consumers who have bought financial products are then left to their own devices unless a new product sale is imminent. Some Wealth Managers currently avoid the cost of customer service and rely on the financial advisor community to interface with the clients. This is effectively a low-cost model.
As an industry we should take control of our destiny and not wait to do the right thing until we are told to do so.
Author: David Lunn. MSc. CFP®. Director Foundation Stone Financial Planning Limited. To Find out more go to www.foundationstonefp.ie