Wealth managers: A blast from the past complicated by the future
10 December 2020
The FCA published its evaluation of the Retail Distribution Review (RDR) and Financial Advice Market Review (FAMR) on 3 December 2020. In some respects the findings were unsurprising - a small increase in advisers, consistent messaging from firms on the challenges of delineating ‘advice’ from ‘guidance’, and the consequential impact on robo-offerings (read our summary of the key findings for more information). For me, though, three themes were noteworthy.
Firstly, there is a change in tone from the regulator towards accessibility. The RDR drove up standards, but also increased cost and reduced consumer access to advice. Now, the FCA’s focus reflects wider political desires to boost mass market access to equity exposure, reducing the quantity of cash held by investors. The FCA does not want a regulatory regime that limits retail investors’ ability to diversify, or hinders HM Treasury’s plans for ‘long-term assets funds’ with mass market participation.
This leads to the second theme: one-off advice. Many offerings are predicated on ongoing advice; even MiFID II tackles ongoing suitability. But the FCA identifies this as a barrier; ongoing costs and perceived complexity can be intimidating. This is not a new theme either - the cumulative impact of ongoing trail charges on pensions has been in the public eye for some time.
The final point to note is the FCA’s findings on ‘price clustering’. The FCA’s competition mandate is new to wealth managers (WMs), but not one to ignore. Similar findings in the 2018 Asset Management Market Study resulted in tough remedies, including annual assessment and attestation of ‘value’ for funds, overseen by new independent directors. WMs should rightly worry about a similar outcome.
So why does this matter and what does this mean? WMs are faring well; the mass market hasn’t really been their core audience, with propositions often having a six-figure minimum investment threshold.
But in the longer term, these themes worry me. Firstly, there is a clear political and regulatory drive to provide greater innovation and services for the mass market, through technology and possibly with one-off advice. Can WMs step up with their existing offerings and business models? If not, someone else will, and while that might not be a problem today, in five or 10 years, how do you justify moving people from their accrued existing ‘cheap’ offerings into more sophisticated services? Your future client base could disappear.
Secondly, value is going to be an issue. Today’s half-a-percent offerings might seem fair (albeit price clustered), but how do they stack up against a passive fund or ETF, distributed with no ongoing cost? The regulatory risk of migrating people to more sophisticated services will increase.
And this has other knock-on impacts for firms. How many firms are valued on, and how many advisers’ exit strategies are based on, multiples of trail income? What happens in a world of one-off advice, passive investments and stringent ‘value assessments’? Is the sector ready to develop better value, more accessible solutions which still create viable business models?
The FCA is using the review as a component of its wider Call for Input in the wealth sector, with further consultation due during the first half of 2021. Now is the time to engage; the historic challenges of the advice market need to be addressed, but against the context and complexity of today’s political and economic environment, and tomorrow’s technology. 2021 looks to be a very interesting year for wealth management.