Falling into the advice gap

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I think preserving the City’s tradition as a place where people can come from all walks of life to make their fortune should be a collective aspiration that not only embraces those who work here, but those who seek to invest here as well. To achieve that, we have to address the advice gap when it comes to financial choices.

In my discussions around the nation's financial health, the question of the advice gap has come up on multiple occasions.

In a world where we seek to champion those who work hard, save and contribute to the society around them, it seems incongruous that systems put in place to protect people are, in many cases, preventing them from receiving the support they need to reap the rewards of their judicious economic efforts.

The cost of advice

A large part of the conversation regarding the growing advice gap hinges on cost. It costs financial institutions, advisors and planners so much to meet compliance regulations that they're unable to advise less well off people because they have to charge so much money to comply with regulations, insurance costs and the FSCS levy. As a result of those high costs, it is not economic for those who have smaller pots to pay the price to receive advice and so the situation perpetuates.

Last year, as part of the joint Advice Guidance Boundary Review with the Government, the Financial Conduct Authority (FCA) wrote:

"The FCA’s Financial Lives survey found that only 8% of UK consumers received full financial advice in 2022. Decisions on saving, investing and how to use their pension pots are critically important, and some may struggle to make the right choice for them without help."

Within the report, Bim Afolami, Economic Secretary to the Treasury, said: "The gap between holistic financial advice that is unaffordable for many, and guidance that is free to access but not personal to the consumer, is simply too vast. This so-called ‘advice gap’ is excluding people with modest investments, who are looking for support that doesn’t break the bank. This just isn’t good enough – we have long needed a middle ground that is affordable and accessible."

How financial advice is communicated

However, the advice gap is not just about cost - it's also about communication within the advisor community. How we present information for nuance, and to inform people better about choices, is essential. For example, the choice to place money in an investment trust (fixed pool of capital) vs an open-ended investment company (a variable pool) is often skewed by the requirements to include certain figures in costs and charges, rather than value.

If you're investing in long-term growth businesses and that have less liquidity then in a fixed pool of capital is arguably more beneficial to the variable option. And there are studies that indicate investment trusts generate better returns over a long period, however, they have recently been trading at one of the biggest discounts to net asset value. In effect, we have a situation where we have a better performing and better structured vehicle performing less well than the more flexible option.

Part of the reason for that ties to advice in that investment trusts are in some instances hamstrung by having to report additional costs in their ongoing charges figure (OCF) to potential investors and independent financial advisors (IFAs). Therefore, optically, the investment trust looks more expensive and isn't recommended, even though it has a lower annual management charge and may be a better structured vehicle for future growth businesses.

Furthermore, the investment trust is a uniquely British structure and in many ways has been one of the gems of our financial services industry as one of the original vehicles for the democratisation of stock exchange. After all, the UK's first investment trusts appeared in the late 1860s with the original one (The Foreign & Colonial Investment Trust, now F & C Investment Trust) still going strong today.

At a time where we worry about the nation's savings rates (the UK savings rate standing at 1.7% - one of the lowest savings rates in the OECD and the lowest level since the 1960s), we should champion those things we've done well in the past. Crucially, we should not confuse ourselves with distracting disclosures that undermine what are very good financial vehicles.

Just to highlight that this is not an isolated challenge, in another example, the London Stock Exchange plc and other industry participants recently responded to proposals to replace the EU Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation and create a new UK retail disclosure framework. They noted:

"The selective inclusion of 'product costs' relating solely to public companies listed in the UK in aggregated portfolio costs and charges disclosures is fundamentally unsound in a market such as the UK where retail, professional and institutional investors have routine access to a wide range of international equity markets. This unequal treatment creates a range of perverse incentives and adverse outcomes that run contrary to the statutory objectives of UK regulation, including undermining fair competition, providing misleading information to consumers, and damaging market integrity."

Creating an environment for healthy independent choice

For individual investment, these things are compounded by a lack of financial education within our system, leaving people in a position where not only can they not access high quality information and advice, but it's very difficult to know what questions to ask to make informed choices.

None of us can possibly know all the answers to everything, and all of us will have our own perspectives and opinions depending on how we view the facts. However, it's in knowing the right questions to ask that we can challenge, learn, understand and make independent choices - that comes from education.

Informed financial decisions should not be solely the domain of those who have large sums to spend. On the contrary, if we want a flourishing economy, then we have to make sure it's one in which all individuals with genuine commitment can also flourish independently.

I have written before that I have been privileged to grow up with many links to the City, and while mine is a privileged story, it's not one of multigenerational silver spoons. I grew up seeing the City as a place of opportunity, and I think preserving its tradition as a place where people can come from all walks of life to make their fortune should be a collective aspiration.

Crucially, that aspiration should not only embrace those who work here, but those who seek to invest here as well.