Did you know that financial advisers only serve a slim minority of the public?
I’m talking about financial advisers who manage the savings and investments (and potentially insurance) of individuals. I’m excluding mortgage advisers for the time being.
Financial advisers are relied upon by less than 4% of the US general public according to a recent poll conducted by CNBC. This survey asked ‘who manages your money?’, and responses included ‘myself’ ‘my spouse’ ‘my parents’ or ‘my financial adviser’. It shocked me to see that the latter category only received a single digit response percentage.
I’ve reflected on why the penetration into this market has so far been so shallow.
Financial advisers are no longer ‘free’
One of the ‘nails in the coffin’ of the financial advice industry was the RDR regulations which came into effect a decade ago. These rules banned the old practice where advisers:
- Provided advice to an individual for no upfront cost
- Collected sales commissions from the investment providers which the adviser directed the investor into.
This practice created a conflict of interest – if the adviser recommended a safe bank account and a super low investing cost index fund, they would have received zero commission, and it wouldn’t have been a sustainable business model.
The only model which balanced the books was where advisers recommended relatively expensive mutual funds with initial fees (which mainly helped pay the adviser) and higher ongoing charges, which helped to pay ongoing ‘trail commission’ to the adviser as well.
RDR put an end to these commissions exchanging hands under the table and made it law that advisers much generate their income from fees charged directly to a client. This made the cost of the service much more transparent – which didn’t immediately benefit the industry.
Under the old approach, investors sometimes unwittingly searched for a financial adviser, being quite unaware of the underlying cost of doing so.
When a fee is charged inside a portfolio and only looks like a small %, it can be easy to ignore or accept. However, when the cost of advice is clearly stated in the investment proposal, it’s not difficult to imagine that several investors decided that they didn’t wish to spend £1,000 – £3,000 on the advice.
This is a shame, as professional advice also delivers tremendous value, particularly where it gives investors the confidence to invest more heavily in equities and tap into the returns of a market which they may have otherwise shied away from.
Financial advisers don’t market to the masses – and the public doesn’t talk about it either
You may notice that financial advice is not advertised on TV. For a combination of reasons, marketing consultants must have concluded that this would not provide a positive return on investment.
However, financial advice is also rarely brought up in any form of public media. Such that it becomes quite a niche sector, catering only to those ‘in the know’.
Because the public is generally quite secretive about the savings and investments (except for investing in property, which we apparently cannot chat enough about), it’s also rarely a topic that would make an appearance at the dinner table.
This leads to a situation in which there is no sense of ‘everyone doing this’. There’s no sense of momentum or trend which would encourage the indifferent savers to check it out. Nobody is shouting from the rooftops about how switching from cash ISAs to stocks and shares ISAs could ultimately transform your retirement.
Instead, you’ll find tonnes and tonnes of passionate savers discussing how to earn £75 by switching current account, or how to save money on electricity bills. There’s a lack of discourse around how people could add £10,000s onto their pension value by adopting the right investment strategy at an early age.
I suspect this is because we are all wary of what we say about investments which could ultimately lead to a loss. It’s easy to passionately share the news about a little freebie or cash giveaway, because it’s a risk-free endeavour. However, would you feel comfortable encouraging a friend to invest, knowing that the market could drop next year?
It’s a difficult balance – between expressing enthusiasm for something, whilst also being clear on the long term nature of equity investing, and the risks involved. I would argue that it would take an entire website to communicate that in a holistic way. It certainly can’t be squeezed into a Facebook post!