What the Consumer Duty requires of firms
For example, firms have to provide you, the customer, with helpful and accessible customer support. It should be as easy to switch or cancel your product as it was to buy it in the first place. Firms are also required to give you timely and clear information that you can understand, so you can make good financial decisions. So, for instance, they’re no longer allowed to bury important information in lengthy terms and conditions as they did in the past. Under the Consumer Duty, financial firms also have to consider if you’re in a vulnerable situation (due to poor physical or mental health, for example) and act appropriately. The new rules also stipulate that any products and services you are offered should be right for you. Firms are not allowed to sell you anything you don’t need or that isn’t suitable. Finally, the Consumer Duty requires firms to provide fair value for money, and to demonstrate that they’re doing so. They’re not allowed to rip you off or ask you to pay costs you weren’t expecting.Why do we even need a Consumer Duty?
You might be wondering why these new rules were necessary in the first place. After all, you might say, surely consumers have a right to expect all of these things from a financial adviser anyway? And you would be absolutely right. When you consult any other professional — a doctor, say, or a lawyer or accountant — you assume that they genuinely are doing their best to help you. A financial adviser should be no different. Although the majority of advisers are competent, ethical and trustworthy, not all of them are. Also, of those advisers who do have these high standards, many are working for firms that don’t look after their clients as well as they should. The key point is this: the very fact that the FCA has deemed it necessary to introduce the Consumer Duty should put consumers on their guard. Yes, financial advice is very important; done well, it can add enormous value. But, even now, many advisers don’t have their clients’ interests at heart, and you need to ensure that yours isn’t one of them. How, then, did this sorry situation arise? Why have so many advice firms been failing to provide their clients with the best advice?A brief history lesson
There are several reasons, but the important thing to understand is that, for several decades, financial advice was mainly about selling products. Back in the 1980s, most advisers worked for large insurance companies. They were financially incentivised to generate revenue for those firms by selling investment and insurance products, which were generally very expensive. Not only that, the products that advisers recommended were almost invariably provided by the insurance company itself. In other words, clients were sold products that made the most money for the company, often regardless of whether they were suitable or gave value for money. The 1990s saw an increase in the number of independent financial advisers, or IFAs. This was a big improvement as IFAs were able to recommend products from a number of different companies. But it was still far from ideal. Why? Because advisers made their living not by selling advice but by earning commission on the products they sold. Not surprisingly, the funds that were recommended most often were those that paid the adviser the highest commissions. There was generally very little transparency. Clients were never presented with a bill, because asset managers paid the adviser directly a set percentage of the assets invested. Compounded over time, commissions severely eroded clients’ net returns. It wasn’t until the late 1990s and early 2000s that questions started to be raised. This was partly in response to the increasing popularity of index funds in the United States, and the growing realisation among advisers, journalists and other commentators that only a very small fraction of actively managed funds actually beat the market in the long run. In other words, advisers were being paid large commissions to recommend funds that, almost invariably, were underperforming simple, low-cost trackers. That’s right: clients were paying for their advisers to extract value from the investment process! Another factor that undermined the commission system was a growing belief that, in any case, investment management is only a small part of the overall service a good financial adviser should provide. In particular, we’ve seen a growing emphasis on behavioural coaching, or helping clients to act rationally and stay invested when markets fall. Tax planning, estate planning and end-of-life planning have also been given a greater prominence. The most significant development, however, has been the emergence of proper financial planning and on managing the intersection between money, life and meaning.Reform was inevitable
Given all these ways in which financial advisers really can add value, it’s completely inappropriate for clients to be paying for the one thing that doesn’t add value — that is, recommending which funds to invest in. Reform was inevitable, and, eventually, regulators decided to act. 11 years ago, financial advisers were banned from receiving commission payments from product providers as part of what was called the Retail Distribution Review. At the same time, the FCA set higher professional standards for advisers through improved qualifications and ongoing professional improvement. It also required investment advisers to make an annual statement of professionalism. Unfortunately, though, the RDR had some negative consequences. For example, many advisers decided to leave the profession, while some firms chose to serve high-net-worth clients only. Both of these things only widened the so-called “advice gap”. The good news is that, although it’s still early days, the Consumer Duty appears to be having a more positive impact. Several asset managers have announced fee reductions, and the UK’s biggest financial advice firm, St James’s Place, has announced that it’s scrapping exit fees from next year. It’s bound to be a long process, but the industry finally appears to be mending its ways.How to find a suitable adviser
So what should you do in the meantime if you want financial advice? Even with the Consumer Duty, remain cautious and vigilant. Remember, the new rules only require firms to provide good outcomes; if you’re looking for excellent outcomes, you need to shop around. There are still huge variations in the quality of service that advice firms offer and in the fees they charge. Generally, you need to be wary of large advice chains, as they often provide poor value. You certainly shouldn’t rule out working with a small firm or a self-employed adviser, but always check their credentials carefully. Most firms will offer you a free consultation, so prepare a list of questions in advance. Make sure you understand the fee structure; paying a fixed fee, rather than a percentage of your assets, is usually more cost-effective for those with larger portfolios. Ask the adviser whether they recommend active funds or broadly passive ones; if they prefer active, you should probably rule them out. Ask them too about all the other services they provide, particularly financial planning; if they seem mainly focused on investing or the financial markets, that’s another warning sign. Finally, ask them about the Consumer Duty and whether they’ve changed their processes in response to it. If they look blankly or can’t provide a satisfactory answer, that’s a surefire reason to look elsewhere. If you want more information on finding a suitable financial adviser, you will find this website helpful.DO YOU HAVE A PLAN?
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