Review to tackle 'financial advice gap'

justin schamotta
By Justin Schamotta

mortgage house business©iStock.com/AlexRaths

IT SHOULD be easy to get financial advice whatever our situation, not just if we're either very rich or very poor.

That principle is the driving force behind a Government review of the financial advice sector, after which they hope to close what they call the "advice gap".

The Financial Advice Market Review (FAMR) is a concerted effort by the Government and the Financial Conduct Authority (FCA) to find out exactly who needs what advice, and to what extent this can be provided.

The review will look into everything from savings and investments, through to mortgages, insurance and retirement income.

Economic Secretary to the Treasury Harriett Baldwin says the review will have a particular focus on how to make advice available to people who "work hard, do the right thing and get on in life".

Free and easy?

The flurry of interest in advice provision comes on the back of recent pension reforms. These changes allow anyone with a defined contribution pension to access the money saved in it.

To help prevent over-55s mismanaging their money, the Government introduced the Pension Wise advice scheme.

Offering free advice on what people can do with their pension pots and any associated implications, the scheme's formation prompted questions about whether the financial advice being provided in other areas was suitable.

Looking for help

In recent years, people have been encouraged to turn to the Government's Money Advice Service (MAS) for free advice on a range of financial matters.

However, a 2014 report suggests that MAS are better at providing debt advice than the type of guidance the majority of people might need.

Nevertheless, one outcome of the Government's review might be to provide MAS with more resources and an increased remit.

Regulators will also consider ways to provide simplified guidance. One option might be a form of automated advice, based on people entering details of their finances or investment objectives.

The decline of advice

The dearth of available advice is partly due to the introduction of Retail Distribution Review (RDR) rules, which came into force at the start of 2013.

These regulatory changes were designed to improve standards of financial advice, and people's understanding of investment costs.

In a nutshell, financial advisers at banks were told that they must charge a fee for their advice, rather than working on sales commissions from product providers.

The intention was to prevent people from being sold financial products that generated money for the advisor but not the investor.

But there are numerous examples where this has gone a little awry, leading to what's known as "commission bias".

The RDR changes also required that advisors be independent of any financial institution. This meant an advisor at one bank could recommend the products from a different bank.

The end result was a huge withdrawal of mass market financial advice from banks. Only people with high "net worth" were deemed worthy of being offered advice face to face.

Filling the void

The idea that only rich people need financial advice is a commonly held fallacy - and one that the FAMR report will address when it is released before next year's Budget.

Astute financial planning and clever investment management is essential for those trying to juggle family, work and retirement plans.

Gillian Guy, Chief Executive of Citizens Advice, agrees.

"At every stage of life it is vital that people have access to the right advice and guidance for their financial circumstances," she says.

"Whether that's help managing their money, dealing with debt issues or getting guidance on key decisions around pensions choices or investment.".