Our industry has seen seismic changes in legislation over the past year and 2016 is set to be another busy year.
As well as the introduction of the new single tier state pension in April 2016, potential changes to pension tax relief, proposals for a secondary annuity market and removal of inheritance tax charges on drawdown, we will have the Financial Conduct Authority’s (FCA) proposals on the delivery of advice following the end of the Financial Advice Market Review (FAMR) consultation.
Technology, which has revolutionised so many industries and consumer services, has only recently begun to have an impact on the financial service industry, so we can expect to see many more new developments as we enter the New Year.
Putting robo-advice in its place
There is no doubt that online advice has an important role to play in helping close the advice gap opened up by the changes brought about by the Retail Distribution Review (RDR).
However, it is not a panacea since consumer engagement is crucial to its success. Evidence from the US suggests that direct to consumer online advice offerings will struggle to make an impact.
Betterment and Wealthfront, two of the more successful US robo-advisers, both starting in 2008, each has roughly $3bn of funds under management.
This might seem impressive but viewed in the context of the investment behemoths – BlackRock and Vanguard with nearly $8trn between them, they are insignificant.
Even the most successful robo-adviser, Financial Engines, which has been in business for 20 years, has only just over $100bn under management, so we shouldn’t expect too much from pure online advice offerings.
As a guide to the future, it is interesting to see that Financial Engines has recently announced the acquisition of The Mutual Fund Store – a financial advisory business with a physical presence in 130 locations around the US. This points the way ahead.
Online advice is a valuable additional channel but needs to be integrated into a comprehensive consumer offering covering self-directed purchase, online advice and full conventional advice.
During 2016, there is little doubt that we shall see many new “robo” advice offerings coming to market and to achieve real success these will need to be part of an integrated advice offering.
FAMR – an everyday story of compliance folk
The optimists among us are looking for great things from this review carried out by the FCA – the stimulus for the review coming from concerns about the advice gap caused in part by the growing aversion to providing advice because of the perceived regulatory risks.
While it is hard to see that there is much scope to reduce the nature of the advice process due to EU regulation and the simple requirement that the financial advice given to consumers should be of an acceptable quality, there is nevertheless a number of things that could be done to improve the current situation.
One of the simplest actions would be to clarify terminology.
There is massive confusion in the use of the words “guidance” and “advice” most obviously illustrated by the Money Advice Service and The Pensions Advisory Service offering guidance but not advice.
A major communication campaign to help the public understand what the financial services industry is delivering and what reliance can be placed on it would be a major step forward.
Beyond this, the FCA could provide major help to the industry by clearly defining the line between guidance and advice.
The FCA’s previous attempt still left substantial “grey areas” which have hindered developments to the detriment of consumers.
Other possibilities which could help to close the advice gap were tantalisingly suggested in the FCA’s consultation paper:
• Allowing the cost of advice to be subsidised – a practice substantially curtailed by RDR;
• Making use of the workplace to deliver advice;
• Facilitating the use of technology to deliver advice more economically – measures to assist the development of Robo advice;
• Reducing regulatory liabilities – maybe limiting the scope of the Financial Ombudsman Service.
Hopefully, we won’t have long to wait. The FCA has promised to publish its response before the Budget.
Following the 2014, Budget and the introduction of pension freedoms which allow consumers aged 55 and over complete freedom over the ways they wish to access their defined contribution (DC) pension savings, the pensions tax regime has competed directly with that of ISAs for older savers (50 and over).
The availability of tax relief on contributions, together with the availability of 25% tax-free cash with pension savings, creates an obvious anomaly and scope for abuse which has only partially been inhibited.
The existence of two tax regimes exempt/exempt/taxed (EET) for pensions and taxed/exempt/exempt (TEE) for ISAs together with rules to limit the scope for abuse also creates needless complexity and hinders comprehension for the typical consumer.
The existence of the opportunity for arbitrage between two conflicting tax regimes also brings into question the durability of the current pension tax structure.
The fact that the above case for reform also brings forward tax receipts and thereby helps George Osborne reduce the budget deficit might, in the minds of some uncharitable cynics, mean that the Treasury consultation was merely political window dressing and that change to the tax treatment of DC pensions is a racing certainty.
There was an expectation of an announcement in the Chancellor’s Autumn Statement, which in the event didn’t happen. However, we should certainly expect to learn of the government’s intentions in the 2016 Budget.
So leaving aside investment market crashes and major world political turmoil, 2016 looks set to be another exciting year, led by innovation in insight and tools enabling advisers and individuals to make the best financial decisions.
Happy New Year!
Bruce Moss is strategy director at eValue