New research underlines what we know to be true: that there is an unmistakeable financial advice gap in the UK. However, three new insights suggest how it can be addressed, writes Derek Smith
The advice gap is really a story of two gaps. There is the gap you’ve read about before, between those individuals who have access to regulated financial advice and those who do not. Then there is the gap you’ve likely heard less about: in the perception of advice between those who have paid for it and those who have not.
New research suggests that almost nine out of ten of those who have paid for financial advice in the last two years found it both helpful and of good value. However, for those who have not taken advice, the perception is very different.
The Advice Gap 2023 report, based on the responses of more than 2,000 British adults, looks at ways the financial services industry can narrow the overall advice gap. Here are three key insights that I believe could help…
Financial advice and a need to be sure
Humans are encouraged to make mistakes – to fail fast in order to learn and grow. But when it comes to consumers’ financial circumstances, mistakes are feared. Unlike in other walks of life, making a misstep by choosing the ‘wrong’ financial adviser or investing in the ‘wrong’ product is seen as potentially unsalvageable.
When it comes to advice and money, consumers want certainty.
For me, one key question that strikes at the heart of the problem of the advice gap is: for those who haven’t paid for advice in the last two years, what would need to change for them to do so? This is where consumers’ fear of mis-stepping reveals itself.
Some 38% of consumers ‘would need to be sure I could trust the advice’ before paying for it. This was marginally higher for female respondents at 40% than 36% for male.
Similarly, a total of 37% indicated they ‘would need to be convinced it would save me money’ – up from 33% in the corresponding study in 2021 – while 24% ‘would need to be sure how to pick the right adviser’.
These results highlight two of the biggest barriers to addressing the advice gap: trust and awareness. Awareness covers both understanding the value of advice and knowing how to find the right adviser. While trust and awareness block those who are not paying for advice from doing so, it is telling that, for those who are paying for advice, a whopping 87% stated that the experience was ‘helpful’.
When things get personal, clients want face-to-face
There is a strong correlation between the key services that advisers tend to offer and consumer preference for face-to-face support.
When conversations with an adviser are more personal, such as providing details on current arrangements or receiving an annual review, it is clear consumers prefer the human, personal environment of an in-person face-to-face meeting.
For less personal financial tasks, such as choosing a financial adviser or applying for a new financial product, consumers have less of a need for in-person support, many instead indicating they would be happy to rely on the internet.
Predictably, understanding financial options in retirement drives the biggest demand for face-to-face support, with 35% choosing in-person as their preferred option. This was followed by ‘consolidating or transferring a financial product’ – possibly given its connection with pension pot consolidation – and then ‘understanding investment preferences and risk tolerance’, which each scored 30%.
A market for modest portfolios
In November last year, the FCA opened a consultation on broadening access to financial advice for mainstream investments.
Companies would be able to offer core investment advice to clients with at least £10,000 in cash savings to help them invest through a stocks and shares ISA – addressing “strong appetite for a market for cheaper and more simplified financial advice to help these consumers”.
The regulator has since acknowledged that support for these proposals has been muted and that another significant piece of work – a review of the boundary between advice and guidance – is also coming down the track.
This is interesting because there is a view – from both the supply and demand sides – that regulated financial advice is not available to those with modest amounts to invest. Is this the case?
The research asked adviser respondents what they would do if they were approached by a potential client with £20,000 to invest and I was a little surprised to see only 16% of firms stating that they would turn them away.
Meanwhile, 39% suggested they have a specific service in place for these clients, while a further 45% stated they’d take them on under certain conditions, as part of an existing family group, for example. One adviser said: “As long as they will pay our flat rate fees, we would advise them normally. You don’t need investable assets to pay for advice. That is an outmoded concept.” Another suggested if clients had the potential to become commercially viable over the longer term, they would consider offering them a service now.
Whatever the motivation there is a clear sense that financial planning firms want to be able to service and support those consumers with a genuine need and appetite for advice, but it has to be commercially viable for them to do so.
As we continue to develop our offering as part of Morningstar, we have a unique opportunity to support advisers, advocating for them and the benefits of quality financial advice with potential clients. There’s a long way to go but we’re starting to see green shoots of possible solutions to the advice gaps.