Honister’s inability to find affordable indemnity cover has led to its entry into administration and significant impacts for advisers and clients. Maybe it will be a tipping point in bringing financial services to its senses.
Honister has been unable to obtain professional indemnity insurance due to the refusal of the FSA to allow for a long stop provision. However, there is an argument to say that a long stop provision isn’t needed, because that’s already too long.
It is unreasonable for an adviser – or anyone else – to be expected to accurately forecast returns over a significant length of time. If we were to a have a punt today at the value of the following metrics in 2037, how much confidence would we have in our predictions?
- UK 10 year gilts
- Average UK house price
Alternatively let’s see how our 1987 predictions for 2012 have fared?
The FSA’s approach risks differentiating advisers based on their ability to beat the market. If you want to beat the market, by default you have to take a more concentrated risk position – otherwise you’ll simply track the market – which means the breadth of the risk ‘window’ is wider for the client.
What most advisers look to give, and should give, is appropriate point in time advice, that can then be reviewed and adapted at future points in time.
Surely the regulator should be supervising:
- What advice was given and why?
- Was it appropriate for the client at that time?
As a population, the news for investors doesn’t appear too bright:
- Living for longer (at least I think we are – I’m not sure if increasing life expectancy is based on the old living longer or improvements in mortality rates of the young. One for another day)
- Lower returns on low risk gilts
- Poor returns on higher risk assets such as equities
- Stagnating house prices (up or down a bit depending on where you live)
- Ongoing economic instability
Therefore, clients need clear advice on the sacrifices they need to make either now (e.g. fewer holidays, more savings) or in the future (e.g. work for longer) or both. They then need that advice reviewed regularly to refine their portfolio based on both its performance and their changing needs.
There must be a concern that
- A lack of insurance cover will result in plenty of advisers leaving the industry
- The RDR approach to fees will result in fewer consumers seeking financial advice
Simplistically, these two outcomes may cancel each other out and leave the right number of clients for the right number of advisers, but being comfortable with what we can measure is only half of the problem.
The opportunity cost of both good advisers and consumers who need advice leaving the financial advice industry could be catastrophic if it results – as it almost inevitably must – in poorer financial planning and worse outcomes.
I’m not sure we can expect the FSA to change their views in the short term about either long stops or fee structures, so what can advisers do themselves?
The simple answer maybe to move as far as possible towards an execution only business, but this is unlikely to deliver the right consumer outcomes.
The harder, but maybe more effective, answer is to continue to improve relationships and transparency with clients:
- Insisting on regular reviews
- Taking as holistic a view as possible of the client’s wealth (earning potential, property etc as well as investments)
- Making client reporting as transparent as possible to help you, the client and, crucially, the regulator
- Creating longer term relationships that see clients from ‘cradle to grave’
To convince insurers and regulators of adviser effectiveness and integrity means maximizing transparency. If the industry can consistently demonstrate this, then the following outcomes maybe possible:
- Increased chances of getting insurance at a reasonable premium
- Reduced chances of litigation (a virtuous circle with the first point)
- Encouragement to the regulator to regulate based on what an adviser can be expected to do, rather than their ability to gaze into crystal balls
- Encourage clients and potential clients to understand that financial advice is a critical service that’s well worth paying a sensible amount for