We hear a great deal about the ‘Advice Gap’. Following the RDR and the prohibition on (most, but not all) commission, the cost of advice has become much more transparent with advisers now charging fees. In the opinion of the ‘great and the good’ this has led to many of the less well-off being disenfranchised from financial advice as they could not afford or were not prepared to pay for advice. This in turn has led to the Regulator doing its utmost to put downward pressure on fees and costs in the (mistaken?) belief that this will open the floodgates and those who have hitherto not engaged with financial advice will now be encouraged to do so. How this squares with the Regulator’s aim of ensuring that firms are solvent and well-founded is somewhat of a moot point.
This in turn has brought on the latest incarnation – Robo Advice., on the premise that automation costs less than a human. Perfectly true if you are making widgets, but somewhat doubtful in this context.
However when one examines the statistics and applies a little logic perhaps the idea of an Advice Gap looks less robust.
We have had static wages for about seven years now. Things look like improving, just as inflation is picking up, so many are still not seeing any real improvement in disposable income. Add to this the impost for many of Auto Enrolment and disposable income is reduced yet further with the prospect of contributions rising as time goes on. The game of catch up seems a chimera.
To this you have to examine the ‘elephant in the room’. The huge amount of debt that the British public carry. Currently UK personal debt stands at £1.524 TRILLION!! That equates to an average per person of £30,185 and when you consider that most of the people I know have no debts at all it rather makes the mind boggle considering what the ‘average’ person’s debt really is.
On this level of debt the annual interest works out at about £50.4 Billion which is £138 million per day. In March this year the OBR forecast that personal debt will be £2.32 Trillion by the year end – and interest rates may go up meanwhile!
To put this in context our GDP is ‘only’ £1.8 trillion. And crocodile tears are shed wondering why people don’t save! If the Government was really serious they would reintroduce credit control. No one may buy anything on credit without a 33% cash deposit. That would concentrate minds. But then it just won’t happen as our economy is firmly based on people going shopping, spending money they don’t have. Why, the bankruptcy laws have even been slackened and they are now even considering making the banks take a more lenient view on people who can’t service or repay the huge debts they have been so foolish to take out in the first place.
So, one may ask, in view of this where does the Government think people are getting the money from to save? Indeed wouldn’t they be better off just reducing their levels of debt? Perhaps this is not policy as the banks may well lose out if debt was reduced. Furthermore when one reviews economic statements it does seem as if our economy is heavily based on retail sales. Indeed as I have said – based on people going shopping and spending money they don’t have. Indeed many have credit card debts, the interest on which is anything from 17% upwards. We now have the situation where car adverts no longer contain the purchase price, merely the monthly cost for either lease or hire purchase. This has led to many paying more a month for their car than for their mortgage, leaving even less disposable income or indeed any at all.
Sky TV, Gym Membership, Barista Coffee, 40 inch TVs and outings to the pub are far more popular than ISAs.
Surveys asking the public whether they like or trust financial advisers are also suspect. How many of those respondents have actually engaged with an adviser and have the wherewithal to participate? Far too many just repeat the opinions of the tabloids, without actually having any first-hand experience themselves. When those who have actually experienced an adviser are canvassed a completely different picture emerges and over 90% express satisfaction. As ever – what value surveys?
We cannot ignore the dream of Robo advice. Indeed it could be said that Robo-advice is to financial service what a rubber dolly is to sex. It probably works and is no doubt a lot cheaper than the real thing, but would you really want to try it? Anyway, much of this assumes that the less well-off segment of the public are that keen to obtain some sort of financial input and that they will sit at their computers (if they have one) and diligently go through what they need for the money they haven’t got. The better off probably have better things to do with their time There is Robo advice and there is the Real Thing.
Firms may be keen to have this in their armoury. They will cut staff costs. They may hope that they avoid complaints as the clients have DIY’ed, and that they will make a killing as they may even be able to take commission. If it looks like a scam & walks like a scam, it probably is a scam.
We are told that automated advice models will be subject to exactly the same, high regulatory standards as other forms of advice.
This looks like Kant to me. So the client gets his Robo advice and then complains. The host says “It’s not us mate – you did it yourself’. This in my view is one of the compelling reasons why the adopters are keen on this sort of advice. Who carries the can?
Secondly if this is regarded as self- service, as I understand current regulation, commission will apply. Another major attraction for the adopters. I can’t see a user signing onto the website and paying (by debit or credit card) an upfront fee before commencing, or indeed before delivery. Commission is the driver here. For the firm and for the customer who once again thinks they are getting something for nothing. How long before we see adverts for ‘No fee advice’?
All this seems to me to militate against the very principles of the RDR. Not for the first time I wonder why the Regulator bothered in the first place. They seem to be dismantling all the principles faster than they introduced them.
There is of course another aspect to this. Once those ‘do- it- yourselfers’ have made a muck of things they will (as history has shown) come running to a qualified IFA to make sense of it and untangle it all and expect a level of service that hitherto has been conspicuously lacking. They will be able to engage and have a sensible discussion, which is conspicuously absent with Robo advice. “What effect will Trump’s tax review have on US investment?” “Do you think I should avoid the UK because of Brexit?” Not forgetting of course that they will always have someone to blame if things go wrong!
So in conclusion perhaps agonising about the ‘Advice Gap’ is actually looking through the wrong end of the telescope. Perhaps instead of looking at products and fees (no doubt important) the spotlight should be aimed at how to reduce debt and thus increase disposable income. Then there is the matter of incentive. Tax would seem the only way to grab people’s attention. However allowing tax incentivisation is not on current government agenda as they are quite evidently, looking to squeeze every penny they can. Debt reduction would also seem to be counter to some very powerful vested interests. So we will probably continue to have disingenuous crocodile tears lamenting the plight of the poor people who don’t engage with financial services – this being entirely the fault of the financial services industry.