We will never solve the advice gap

How do you solve a problem like the advice gap? Time and time again, we are treated to diagnoses of the spread of this terrible disease. So often, in fact, that I’m starting to think the affliction is terminal.

I’m not shocked that there is an advice gap. Advisers did some bad things in the past. Trust takes generations to rebuild. Take a ‘profession’ like claims management. Some ambulance chasers, I’m sure, are lovely people. But would you, as an adviser, ever think it was worth paying them to pursue down miscreants for you? I thought as much.

I am, however, shocked how many people wouldn’t take advice even if it was free. When asked whether they thought they would benefit from free money advice, some 20% said they “tend to disagree” around 15% “strongly” disagreed, according to one study released last month.

Those numbers suggest a ceiling that won’t be broken no matter how hard we try. A non-zero number of people – probably more than we acknowledge – will always think they know better than a professional financial planner, or think they just don’t need one.

That number might even keep growing. UK DIY assets have hit a record £420bn, according to another recent study, across 10.4 million investment accounts. Those might be the advised clients or tomorrow. Or they might decide going alone has worked out just fine, thanks very much. It’s as much an advice gap as it is a perceived usefulness one.

Awareness of online tools is only increasing with the march of technology. More might join the cohort of DIY champions instead of turning to planners as the functionality and user experience from apps and other investment platforms improve. While today only 3% of consumers say they would use AI to get financial advice, it’s not hard to imagine that number ticking up in the future.

Let’s not forget the government already runs a free ‘advice’ service. It has spent millions on promoting it, but 75% of those who agreed they would benefit from free advice haven’t heard of Pension Wise, according to one of the studies. The proportion of people with more than £10,000 willing to shell out for advice has actually nudged down to 44% this year, which doesn’t bode well for the assumption that the great intergenerational wealth transfer that’s on its way will automatically head into financial planners’ pockets.

Take it from the people who were there at the time; if we haven’t managed to solve these problems in the decade since the Retail Distribution Review, it’s highly unlikely we will do so any time soon.

I caught up with Sheila Nicoll the other day, who you may remember from helping write those reforms while she was at the Financial Services Authority before holding top private sector policy roles. “The RDR was absolutely the right thing to do, we professionalised the industry, and yes you hear quotes about the number of advisers declining, but it’s about the quality rather than the quality,” she said. “But I hold my hand up; we did create an advice gap. We’ve still not cracked that one.”

Part of the problem, as Nicoll told me, is that “the UK has tied itself up in too many knots about the definition of advice.” But the other part is that, wherever you look, reforms we think are actually good for consumers might just end up exacerbating the advice gap issue.

Take a recent conversation I had with a lawyer who had been drafted in by a party related to the Woodford Investment Management collapse. Many have noted that while authorised corporate director Link Fund Solutions and Neil Woodford himself have been stung for millions by the FCA, Hargreaves Lansdown – which punted the fund through its best-buy lists – got off scot-free. (It wasn’t the only one. According to Fundscape’s Gatekeeper analysis, there were 4 D2C platforms with the Woodford fund on its lists when it imploded.) Surely letting platforms get away with such troublesome recommendations isn’t a good thing?

But, the lawyer continued, imagine if Hargreaves had faced the wrath of the regulator. If the UK’s largest platform was fined for simply compiling a list, we could soon run into a situation where no one gave retail investors any information at all for fear of a law suit.

Did the company ‘advise’ savers to plough thousands into Woodford? The semantics are debatable, but, in a regulatory sense, the answer is clearly no. Complete consumer protection and access to advice aren’t always two sides of the same coin; they can be two different coins entirely.

Yes, Hargreaves probably published some bad research. But not trying to help investors at all, across the market, may be an even worse outcome than what befell those who listened to the platform on this one occasion. It would have been another case of well-meaning regulation to extend the definition of advice that far, but it would have ended up having disproportionate unintended consequences.

So let’s be realistic about just how far we can close the advice gap, and how quickly. Otherwise we might have to go straight back to the doctor’s office again.

Photo by Brian Kelly on Unsplash