The advice sector is under the cosh as it struggles to respond to the previously underestimated demands of consumer duty.
Just nine months ago, the gossip was all about giant St James’s Place, but now the pain has arrived at the doorstep of many more.
We have all read the headlines about ongoing servicing challenges. When it comes to evidencing annual meetings and check-ins, there is an almighty mess out there. In the pre-Salesforce era, paper diaries, filing cabinets and decentralised processes didn’t ‘do data’.
So, did annual reviews happen and, if so, where’s the proof?
According to Citywire discussions, approximately 85% to 90% of advised clients have likely had annual reviews. However, there are significant discrepancies among firms, with a few outliers reporting much lower numbers. This issue is particularly pronounced in sales-oriented advice firms and networks lacking central control.
What do neglected customers look like? Money talks and the most neglected group will likely be the smaller clients, especially those with less than £100,000.
Consider the impact of numerous advisors retiring or selling their books of business, which significantly exacerbates this servicing issue.
Without a personal connection, advisers are less motivated to serve smaller, unknown clients, leading to poor outcomes for the majority.
This situation will create a new problem for companies that merge businesses and those supported by private investors. If you have a group of clients where only 85% have gone through documented evaluations, as part of a thorough examination of consumer responsibilities, you will need to take corrective action.
The current situation is making transactions in the sector more difficult. Concerns about a compensation scheme like the one for the mis-selling of payment protection insurance (PPI), or uncertainty about future regulatory action, will make the due diligence process longer and more complicated. This will lead to increased insurance and claims costs across the board.
Ned Cazalet's 18-year-old report, "Polly Put The Kettle On," suggested that there were no new customers, just recycled ones. Lower-level advised clients, now posing too much risk for traditional wealth managers, may become the focus of new hybrid advice models. Traditional wealth managers are expected to engage in significant client recycling to reduce risk.
Over the next 12 months, consumer duty will be a significant challenge for the advice sector, and the review of advice guidance boundaries is eagerly anticipated as a potential game-changer. New players and business models are actively pursuing the opportunity to serve returning clients and address the needs of the 12.2 million UK adults identified in the advice gap by our Boring Money research. While consumer duty represents the right ambition, it is not without its concerns.
Consumer duty aims to ask the right questions and correct decades of an industry that prioritised intermediaries, often neglected customer needs, and failed to ask the right questions. Here are two facts that highlight the issue: 49% of portfolio managers and 69% of stockbrokers told the regulator that they have no vulnerable customers, as was pointed out in one of the Dear CEO letters. This was a surprising and concerning revelation.
When assessing value, most advisory firms rely on very high client satisfaction levels (83% of advised clients are very satisfied) as evidence of their excellence. However, new industry research reveals that only 49% of clients who recently ended their advisory relationships were very satisfied.
Despite the clear need for data-informed improvements, it's important to note that large organisations don't change direction quickly. The FCA's desire for change is a delicate balance between potential failures and consolidation on one side and progress on the other.
The FCA (Financial Conduct Authority) has rightly brought attention to the issue but now faces a dilemma.
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