Robin Powell: Advice shouldn’t be just for the rich

I recently had the privilege of attending the Dimensional Advanced Conference in Texas.

As any adviser who works with Dimensional Fund Advisors (DFA) will tell you, this is one very impressive company. Its commitment to the fiduciary principle and its steadfast dedication to empirical evidence set it apart from virtually every other asset manager in the world.

“It’s just a shame,” a fellow attendee remarked as we said our goodbyes at the end of the conference, “that it’s only rich people who actually benefit.”

Cutting regulatory costs and red tape will help small firms reach more people

He was right, of course.

Although DFA has started offering exchange-traded funds independently of advisers in Australia and the US, most people with money invested in DFA funds are paying for ongoing advice.

To afford that luxury, you generally need investable assets of at least £400,000. The average DFA investor has a far larger portfolio than that.

DFA would no doubt love to see its expertise benefit more people. I’m equally sure most advisers using DFA funds would also like to help those of us who don’t have a multimillion-pound portfolio.

But we live in the real world. Advice firms are businesses, not charities; for most, serving a wider market is not commercially viable.

Consumer Duty

The Financial Conduct Authority, too, is keen to make advice more affordable to those with a smaller portfolio. Yet the Consumer Duty, alas, has made it harder for firms to work with these investors.

Financial regulation needs to be simplified, but any reduction in regulation must be carefully targeted at areas such as the advice gap

At a recent Seccl event, the head of Vanguard’s UK client group, Doug Abbott, argued that the Consumer Duty was unintentionally forcing advisers to focus on serving wealthier clients.

“Advisers are pushing away clients who have £200,000 in investable assets,” he said. “The regulation makes it too difficult to serve this client base.

“In turn, this is contributing to a gap in advice and support available to the mass affluent.”

Abbott is by no means a lone voice. Dynamic Planner chief executive Ben Goss has warned that, although the duty has “the potential to drive significant client value”, the reality of implementation has “proved more challenging” than expected.

The Financial Conduct Authority, too, is keen to make advice more affordable to those with a smaller portfolio

A report by The Lang Cat found that 55% of advisers had stopped serving at least some of their clients as a result of the Consumer Duty. Research by Boring Money backs this up, finding that more people have fallen into the advice gap over the past year.

There are no easy answers, but one of them must be artificial intelligence (AI). Thanks to AI, jobs that used to take hours can be completed in minutes.

Similarly, the rapid development of secure, app-based planning is making client communication much more efficient. And the increased use of young apprentices, particularly in triaging new clients, is helping firms serve more people, more quickly and easily.

Undoubtedly, though, closing the advice gap must entail a degree of regulatory reform. The regulatory burden on advice firms is simply too great and it disproportionately affects the smallest businesses.

Advisers are pushing away clients who have £200,000 in investable assets

Another report by The Lang Cat found that fear of more compliance and regulation had become the top concern for almost a third of advice firms.

Fine line to tread

At the same time, I worry about noises emanating from the FCA about its direction of travel.

The previous government gave the regulator what it called a secondary international competitiveness and growth objective, which came into force in August 2023. In other words, as well as protecting consumers, the FCA has another duty now: to promote the UK’s financial sector and wider economy.

Clearly, this new dual role creates a conflict of interest. After all, what’s good for the financial industry is often bad for financial consumers, and vice versa.

Advice firms are businesses, not charities; for most, serving a wider market is not commercially viable

The regulator, then, has a fine line to tread. Financial regulation needs to be simplified, but any reduction in regulation must be carefully targeted at areas such as the advice gap.

Cutting regulatory costs and red tape for small firms will help them offer world-class investment solutions from the likes of DFA — as well as ongoing planning — to a much broader range of people.

But the need to protect consumers from much larger, vertically integrated businesses is as great as it’s ever been.

Robin Powell is a freelance journalist and editor of The Evidence-Based Investor

This article featured in the November 2024 edition of Money Marketing. 

If you would like to subscribe to the monthly magazine, please click here.