increasing consumer access to advice · 51 gresham street london ec2v 7hq 020 7600 3333 increasing...

INCREASING CONSUMERACCESS TO ADVICE May 2010

For more information, contact:

Association of British Insurers

51 Gresham Street

London EC2V 7HQ

020 7600 3333

www.abi.org.uk

INCREASING CONSUMER ACCESS TO ADVICE 3

Summary

Since 2006, the Financial Services Authority (FSA) has been undertaking a review of the distribution of retail investment products in the UK. This Retail Distribution Review (RDR) is designed to improve outcomes for consumers who seek financial advice on retail investment policies, such as individual pensions.

In March 2010, the FSA outlined their final rule changes as part of this review. These changes are expected to lead to an improvement in the service received by those consumers who already access advice. But many in the wider industry are concerned that these changes will further reduce consumer access to advice. This could prevent a large number of consumers from accessing the help they need to save for the future and ensure their families are adequately protected.

The ABI commissioned research to look at the cost of full advice and how consumers prefer to access investment products. The research found that as full advice costs £670 in total, it is beyond the reach of about two-thirds of the UK adult population. The ABI has therefore developed proposals for a new financial advice process which is automated and driven by IT. This is designed to serve consumers who cannot afford, or do not require, the level of service offered by full advice.


4 INCREASING CONSUMER ACCESS TO ADVICE

Contents

Introduction 5

Research key findings 7

ABI proposals for a new financial advice process 13


1. Introduction

After three and a half years of discussion and consultation, we are finally nearing the end of the Retail Distribution Review journey. Following the publication of the final RDR rules in March 2010, product providers, fund managers and financial advisers have until 31 December 2012 to implement these new rules in their businesses.

The new RDR rules have been developed by the FSA to increase consumer confidence in financial advice by removing the potential for commission bias and increasing the professionalism of financial advisers. The ABI has supported the objectives of the RDR since it began in 2006 and continues to believe the new rules are necessary to improve consumers’ experience when accessing financial advice.

However, the new rules are widely predicted to reduce the number of financial advisers and increase the cost of advice. Evidence of advisers shifting their business models further up market, where advice is valued and affordable, can already be seen. This will increase and prevent a large number of consumers from accessing advice, restricting their ability to access products which will help them save for the future and ensure their families are protected. This is a concern for the industry, consumers and the Government.

To better understand the impact of the RDR on consumer access to advice, the ABI commissioned two research projects:

• A literature review which draws together the findings of research projects that explore how consumers prefer to access financial advice and information for investment products

• An investigation into the key components of a ‘full advice’ process to quantify the time and costs associated with delivering these services

These research projects have found that consumers prefer to access financial products with advice. However, existing full advice services typically cost £670 in total and are beyond the reach of about two-thirds of the UK adult population.

To meet the advice needs of a large and growing number of consumers who are unable to access existing full advice services, the ABI and its member companies have been developing proposals for a new financial advice process, known as simplified advice.

This simplified advice process is designed to meet straightforward consumer needs through a limited assessment of their financial circumstances to deliver a suitable recommendation. Unlike full advice, it is not designed to meet the full range of consumers’ needs, but to provide advice on specific circumstances.

Central to offering this process at a price which consumers can afford, is the process driven nature of the service. The process will be automated by an IT driven system which consumers can access via the internet unaided, over the phone or face-to-face where a facilitator guides the consumer through the pre-determined questions. The whole process should take no longer than 30-45 minutes, significantly less than 7 hours 40 minutes our research shows is typically needed for full advice.

Despite the potential consumer benefits of a simplified advice process, firms are not yet in a position to develop services of this type. The FSA and Financial Ombudsman Service need to provide certainty around their requirements for such a process. Agreement on the appropriate disclosures and how the service can be charged for is also needed.

This paper outlines in more detail the key findings of the research and the ABI’s proposals for a simplified advice process.



2. Research key Findings

Financial advice and information research review1

In early 2010, the ABI undertook a review of existing research to explore how consumers prefer to access financial advice and seek information on investment products. This review sought to address two specific questions:

• How do consumers prefer to purchase investment products (e.g. with or without financial advice)?

• For consumers wanting financial advice when purchasing an investment product, how do they prefer to access this service (e.g. face-to-face, by telephone or the internet)?

How do consumers prefer to purchase investment products?

The most important finding of the research review was that consumers prefer to access investment products with financial advice. Those purchasing mortgages are the most likely to seek professional advice, followed by people buying life assurance, protection policies and investments. The main reasons consumers use advice to access financial products are:

• The ease and convenience of using an adviser to search the market for the mostsuitable product for their financial needs.

• Advisers are more knowledgeable and better placed to recommend a suitable product.• Consumers do not have the time to observe the market and follow its trends on a

regular basis.• Consumers have a lack of understanding and engagement with investment

products and the process to purchase them.

For consumers who had received financial advice in the last five years the most popular source was through an Independent Financial Adviser (IFA). Banks and building societies were the next most popular followed by mortgage advisers and accountants.

1Association of British Insurers, Financial Advice and Information Research Review, February 2010 – see: http:// www.abi.org.uk/content/contentfilemanager.aspx?contentid=47229


How do consumers prefer to access advice?

Consumers prefer to access advice through a variety of channels rather than relying solely on one source. This includes face-to-face services and the internet. As Figure 1 shows, half of respondents who had sought financial advice to help them plan for the future used the internet. Fifty-two percent of those surveyed used a financial adviser, with an independent adviser more popular than an adviser linked to a product provider.

Figure 1: When looking to purchase a financial product, where wouldyou normally go to obtain advice?

Notes: Multiple responses allowed. All those who have sought financial advice. Sample size 1,360. Any sources used by less than 10% of respondents have been excluded from the above graph

Source: Q3 2009 ABI Savings and Protection Survey

Consumers who sought professional financial advice often supplemented this with their own research. The research review found that consumers prefer to access information from sources which they believe are independent and impartial, such as that provided by the media and internet ‘best-buy’ tables, rather than using public and third party sources such as the Citizen’s Advice Bureau.

The internet is becoming an increasingly popular source of financial advice and information, especially among young people. 89% of people aged 18-34 would be happy to purchase a financial product over the internet. For many consumers, price comparison websites have become a substitute for independent financial advice, although most recognise that more complex products that involve life-changing decisions require specialist advice.

60%

50%

40%

30%

20%

10%

0%The internet

(e.g. pricecomparisonwebsites)

An independentfinancial adviser

A bank orbuilding society

Your friendsor family

The money section of a newspaper

A financial adviser who is linked toa company


Which features do consumers prefer an advice service to include?

As Table 1 shows, consumers generally prefer financial advice to undertake a comprehensive analysis of their financial circumstances and to recommend a product from a wide range. These features are likely to be associated with full advice delivered by a financial adviser. Characteristics associated with simplified advice were also popular with consumers, as a more economical and quicker alternative to full advice.

Table 1: Importance of features in the advice service

Product featuresConsistent with full or simplified advice advice?

General population(mean score)

Comprehensive analysis of financial circumstances

Full advice 31

A wide range of products that the adviser can recommend

Full advice 30

Adviser is able to select products from any/all investment companies in the market

Full advice 27

Streamlined process which may take less time than other advice

Simplified advice 23

Cost of advisory service Full and simplified advice

22

Take enough information to give advice based on matching consumers to products appropriate for their needs

Simplified advice 21

Full access to complain and obtain possible compensation if the product is mis-sold

Full and simplified advice

22

Notes: A mean score has been allocated out of 100. Sample of 1,986 (general population)

Source: ABI and Gfk NOP on behalf of the FSA (2008)


The research review highlights two characteristics of advice which might influence a consumer’s decision to take financial advice. This includes how the adviser is paid and the qualifications and skills of the adviser. As part of the RDR, the FSA will require advisers to agree their remuneration with their clients independent of product providers. This Adviser Charging model replaces the current commission-based system. Although many consumers acknowledge the independence of non-commission-based advice, evidence suggests that consumers could see Adviser Charging as a barrier which may deter them from seeking advice.

Cost of financial advice research paper2

In 2010, the ABI commissioned Charles River Associates (CRA) to undertake research to identify the key components of full advice and quantify the time and cost associated with each individual component.

Full advice undertakes a comprehensive assessment of a consumer’s financial needs to recommend action or products which meet their requirements. On average, full advice typically takes around 7 hours 40 minutes from start-to-finish and includes meetings with the client, preparing recommendations and post-sales administration.

The time taken to deliver advice does vary by channel, with banks and building societies typically taking less time to provide advice than independent financial advisers, primarily due to the nature of their service. The time taken also varies depending on whether the client is a new or an existing customer of the firm and by the type of product recommended. Figure 2 shows the average time it takes to provide advice on investment and savings, pension and protection policies.

Figure 2: Time taken to deliver full advice by product

Source: CRA calculations

2Charles River Associates on behalf of the Association of British Insurers, Cost of providing financial advice:Identifying and quantifying the costs of the key components of a full advice service, May 2010

Investment and savings Pensions Protection

Tim

e to

pro

vide

ful

l adv

ice

(hou

rs)

00

1

2

3

4

5

6

7

8

9

10


Given the comprehensive nature of full advice, it is unsurprising that the time taken to deliver this is typically nearly eight hours. This is therefore reflected in the cost. On average, full advice typically costs £670 in total. Following the implementation of the RDR, this cost is widely expected to increase.

Based on the cost of providing full advice, the research has calculated the minimum case size which is profitable. On average, consumers with less than £257 per month to save or £13,730 to invest as a lump sum cannot be economically served by full advice.

The most striking conclusion highlighted by this research, is the proportion of the adult population whose needs cannot be profitably met by full advice. According to the research, over 30 million UK adults are beyond the target market of full advice. While not all of these people need full financial advice, a significant proportion could benefit from more economical financial advice which could help them protect their family and better save for the future.


3. ABI proposals for a new financial advice process

There are three key conclusions which can be drawn from the financial advice and information research review and the cost of advice research:

• Consumers prefer to access financial products with advice, especially for mortgage, life assurance, protection and investment products.

• Advice typically costs £670 in total and is therefore beyond the reach of about two-thirds of the UK adult population.

• Although consumers seem to prefer features which are likely to be associated with full advice, simplified processes are also popular.

Based on the findings of these research projects, the ABI believes there is a need for a cheaper advice process for those people who cannot afford, or do not require, existing full advice propositions. The need to develop a more economical service is likely to grow as changes included in the RDR are implemented. Indeed, it is widely predicted the RDR will reduce the number of financial advisers and increase the cost of full advice even further. This is a concern for consumers, the industry and the Government.

Previous Government initiatives to increase access to advice

The Government has previously attempted to develop a more economical alternative to full advice. In 2002, as part of the Sandler Review, the Government developed Basic Advice. This failed to widen consumer access as most firms were financially unable to offer this across a wide variety of consumers.

More recently, the Government’s Money Made Clear initiative, which will provide free generic financial advice, aims to help more consumers identify their financial priorities. We believe Money Made Clear can be an invaluable source of help for consumers requiring impartial support when making important financial decisions. However, it will not provide a product recommendation, leaving many without the help they need to confidently select a product appropriate to their circumstances.


The ABI’s proposals for simplified advice

To meet the advice needs of a large and growing number of consumers who are unable to access existing full advice, the ABI and its member companies have been developing proposals for a new financial advice process, known as simplified advice.

This simplified advice process is designed to meet straightforward consumer needs through a limited assessment of their financial circumstances to deliver a suitable recommendation. Unlike full advice, it is not designed to meet the full range of consumers’ needs, but to provide advice on specific circumstances.

Importantly, any consumer who is beyond the scope of simplified advice would be filtered out of the process and recommended to seek a more appropriate form of advice. This could be full advice, where a consumer’s circumstances are too complex for a simplified advice process, or a Money Made Clear service, where it is not appropriate for the consumer to purchase a product.

The ABI has identified three groups of consumers who could benefit from a simplified advice process:

1. Consumers who recognise the need to save and invest after using Money Made Clear, but require further advice to determine which product meets their needs.

2. Consumers who are already unable to access existing advice services.

3. Consumers who are currently served by existing advice services, but whowill be unable to afford or will be unwilling to pay for this following theintroduction of the RDR.


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Figure 3 shows the spectrum of advice and sales services that will exist following the implementation of the RDR. Simplified advice will fill a significant gap in the market for individuals who require more than just information but do not need a full advice service.

Figure 3: Advice and sales services following the implementation of the FSA’s RDR

Central to offering simplified advice at a price which more consumers can afford, is the process driven nature of the service. A simplified advice process is automated and IT driven which the consumer can access via the internet unaided, over the phone or face-to-face where a facilitator guides the consumer through the pre-determined questions. The whole interaction should take no longer than 30-45 minutes, significantly less than 7 hours 40 minutes typically needed for full advice.

The ABI has developed guiding principles for a simplified advice process. These are based around the key stages as shown in Table 2 opposite. As part of this guidance, we have identified the Treating Customers Fairly outcomes and key requirements firms should meet to fulfil each principle.

Money Guidance

Executiononly

Basic Advice

Non-advisedservices

Advised services

SIMPLIFIED ADVICEPROCESSES

Full HolisticAdvice

FocusedAdvice


The ABI has proposed that the products delivered through a simplified advice process should initially meet one of four straightforward consumer needs. These are outlined in Table 3, along with the products which could fulfil this need.

Table 2: The ABI’s six guiding principles

Source: The ABI’s guiding principles for a simplified advice process

Principle Stage of process Guiding principle

A Service design Design a process driven service to provide customers with suitable recommendations based on a limited assessment of their financial needs

B Promotion Promote the service to identified target groups

C Pre-filtering process Filter out customers who are beyond the scope or limitations of the service in good time

D Advice process Undertake a limited assessment of the customer's needs to deliver a suitable recommendation

E The product Products should be designed to meet straightforward customer needs, with the benefits, limitations, charges and other considerations easily explainable

F Role of a facilitator The facilitator should assist the customer through the process. They would have no freedom to influence the recommendation

Table 3: The four key consumer needs which could initially be served by asimplified advice process

Source: The ABI’s guiding principles for a simplified advice process

Straightforward consumer need Product

The provision of income in retirement Retirement annuities

A cash payment on the death of a key family member or replacement income in the event that a financial provider is unable to work

Term Assurance and Income Protection

Saving for a future life event or investing a lump sum for a known period

Regular & single premium investment/ savings policy such as ISAs or ISA compatible products

Whether to enrol in a company pension Group Personal Pensions



Once a simplified advice process has been shown to successfully serve these consumer needs, it might be appropriate for firms to expand their simplified advice models. It is possible that this could be designed to deliver a wider range of products.

Despite the potential consumer benefits of a simplified advice process and the widespread industry support for the proposals, there are four obstacles which are preventing firms from developing these services:

1. Uncertainty around how this will be judged, especially by FSA supervisors – the industry requires FSA general guidance to provide clarity.

2. Uncertainty around how the Financial Ombudsman Service will judge any complaints – the industry requires clarity that any complaints would be judged based on the limitations as explained to the consumer.

3. Current FSA proposals to require an individual facilitating the process to hold a QCF Level 4 qualification. We believe this is an inappropriately high qualification level, as an individual facilitating a simplified advice process will be restricted to guiding the consumer through the pre-determined process.

4. Current FSA proposals which require a simplified advice process to operate an Adviser Charging-based remuneration model. We believe this will discourage many consumers in the target audience and create consumer confusion. Instead we propose that the cost should be clearly disclosed to the consumer at the end of the process but before any product recommendation is effected.



Testing a mock simplified advice process

To evaluate the effectiveness of a simplified advice process, the ABI commissioned independent consumer research to test a mock process.3 The results of this research are positive, with 83% of respondents rating their experience as either very good or quite good, as shown in Figure 4 below.

Figure 4: Rating of overall experience of a mock simplified advice process

The research also found a significant proportion of consumers are willing to put their trust in a simplified advice process and believe it can help them identify and meet their financial needs.

Neither good nor poor

Very or quite poor

Very or quite good

Notes: All respondents. Sample size of 214

Source: ORC International

13%4%

83%

3ORC International on behalf of the Association of British Insurers, Assisted Purchase: A quantitative study testing consumer reactions to a new distribution channel, 2008 – see: http://www.abi.org.uk/content/contentfilemanager.aspx?contentid=25014

18 INCREASING CONSUMER ACCESS TO ADVICE18 INCREASING CONSUMER ACCESS TO ADVICE

Conclusion

Although the advice landscape will undoubtedly change in the run up to the introduction of the FSA’s new RDR rules in 2012, consumer access to suitable types of advice is an issue that is predicted to grow as commission is replaced by transparent advice charges. As it stands, the FSA is in danger of failing to fulfil one of their objectives for the RDR – enabling more consumers to have their needs and wants addressed. It is therefore vital that the industry works closely with the regulator and the Ombudsman Service to ensure consumers can access suitable, affordable financial advice. We believe our proposals for a simplified advice process would enable consumers to access a financial advice service suitable for their needs at a price they can afford.


For more information, contact:

Association of British Insurers

51 Gresham Street

London EC2V 7HQ

020 7600 3333

www.abi.org.uk

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