On 31 December 2012, the Retail Distribution Review (RDR) was introduced by the Financial Conduct Authority (FCA), our regulator responsible for maintaining the integrity of the financial markets in the UK.
The RDR contained several key measures intended to introduce greater transparency and fairness in the investment industry and to further professionalise the retail investments sector. It also effectively brought to an end the commission system and replaced it with a fee-based model referred to as ‘adviser charging’.
One of the biggest unintended consequences of the RDR has been what many describe as an ‘advice gap’. This has been caused by high street banks, investment management firms and financial advisers withdrawing services for those with generally less than £100,000 to invest. They argue the cost of servicing these clients has become too high. Additionally, the RDR professional qualification requirement forced many advisers to leave the industry, resulting in countless ‘orphaned’ clients. Over the last two decades, adviser numbers have fallen significantly with only around 34 000 licensed advisers according to FCA returns for 2016. Approximately 14 600, or 43%, are independent; we are independent. There is also a distinct lack of information on the average age of the UK adviser but anecdotally it is put at mid-fifties.
According to AXA Wealth, there is only one adviser for every 2,700 people in the UK who require help with their finances. This compares to ratios of one adviser per 1,400 people in Australia and one per 156 savers in Hong Kong.
According to the FCA, two thirds of retail financial products are purchased without advice i.e. non-advised as per FCA definition. Back in October 2015, the Citizens Advice Bureau estimated that 5.4 million Britons are willing to pay for advice while 14.5 million are unable to pay for it altogether.
The figures suggest that many UK consumers are making big financial decisions alone, at a time when they have unprecedented control over their pensions. Over the past five years, auto-enrolment has gradually been introduced, making workplace pensions mandatory. This was followed by the ‘Pension Freedoms’ in April 2015, which axed compulsory annuities, giving those aged 55 and over full access to their pension pots.
Since the RDR was introduced, robo-advisers have sought to address the issue, with new entrants and established firms offering online services for those with smaller sums to invest. Some deliver investment management online, while others provide automated financial advice. They are typically powered by computer algorithms and involve little or no human interaction. Although technology has the potential to plug the advice gap by offering lower-cost services to a wider range of consumers, the robo-advice market still has much further to go before it reaches this point.
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