UK consumers priced out of advice

Research firm CoreData has pointed to what it sees as unintended consequences of financial services reform taking place in the UK, warning changes to adviser remuneration may see many consumers priced out of the market.

The changes to adviser remuneration taking place in the UK are similar to those taking place in Australia, with reform being conducted by the UK’s Financial Services Authority under its Retail Distribution Review (RDR). The changes include new rules prohibiting advisers from being paid commissions by product providers.

“In an ideal world, fee-for-service would be the way to go; removing the potential for advice to be swayed by the payments on offer from product providers,” CoreData said.

“However, in reality, fee-for-service will close the door for thousands of British consumers who neither have the ability or inclination to pay a fee for financial advice.”

Research conducted by CoreData found “very few” investors would be willing to pay more than 1 per cent of assets under management to “access an investment administration platform and receive advice therein”.

The group found a “large proportion” of clients would not pay more than 0.5 per cent of assets under management.

The implication of this, according to CoreData, is that in a commission-free world, advisers will only service clients with sufficient assets to cover their costs – potentially cutting a large percentage of the British population from advice.

CoreData estimates the average cost to service a client in the UK market is around £2,500. The group said that includes the initial cost of setting up an account, conducting a fact-find, creating a financial plan, communicating that plan to the client, undertaking the asset allocation and placement of investments and then regularly monitoring performance, as well as an annual review to assess the client’s ongoing strategy.

At an average cost of around £2,500, the group argued advisers would only be attracted to clients with between £250,000 and £500,000+ of net disposable assets, with £250,000 the cut off for those willing to pay 1 per cent and £500,000 the cut off for those willing to pay only 0.5 per cent.

“Two thirds of British investors have net assets below £250,000 – and this is only of the people who are active investors, this doesn’t even include the many millions of people who are not actively investing,” CoreData said.

CoreData argued the RDR will need to be “tweaked before its full roll-out in late 2012, otherwise it could in theory damage the lives of the many consumers it was meant to protect in the first place”.

If the RDR is rolled out as is, the group questions what the outcome will be for those “few million” clients who are “shut out of the market” due to the cost of advice, and whether ‘comparison sites’ or banks will step in to fill the void.