The country's biggest financial advisory firm, Hargreaves Lansdown, has announced that it is no longer going to offer whole of market independent financial advice. Instead it is going to offer 'restricted advice' en masse at a cheaper cost. This means that clients will now be recommended products from a more 'restricted universe' - hence the name.
This marks a general move by the industry as a whole to start offering restricted advice, rather than whole of market financial advice. Others within the industry are criticising the moves claiming it's driven by greed and the desire to boost company profits.
But that is oversimplifying things slightly. Of course there will be some unscrupulous firms who might use the restricted route to push products with bigger profit margins. Yet one big problem with offering whole of market independent financial advice is the compliance burden that comes with it. That makes it uneconomical for many companies to provide whole of market advice en masse.
If you want to offer mass market independent advice you either have to automate it (robo-advice, as they have in the US) or simplify your process to improve margins. The latter means going restricted.
In theory the emergence of restricted advice could actually mean that more people will get access to some form of financial advice, albeit restricted. In truth most consumers will never have a need for some of the esoteric financial products that exist, so the need for whole of market advice is questionable.
The move to restricted advice (and robo-advice) is just a natural consequence of the increased regulation and the arrival of the RDR (Retail Distribution Review) a few years back. So the move to restricted advice models will not always be driven by greed. It’s also driven by a necessity for some financial advisers to simply stay afloat.
The financial advisory industry is in a state of flux and the move to restricted was always going to occur once RDR was implemented. If the powers that be didn't see all this coming then what were they expecting?
The real problem with this new restricted advice trend
Of course restricted advice becomes a problem when the level of restriction is stacked in favour of those providing the advice (better profit margins) rather than in favour of the consumers they serve. The worst kind of financial advice is that given by banks, which simply look to push their own products with chunky profit margins. Just look at the fines handed out to the likes of Santander for their investment advice in recent years.
Trying to get the message across to people not to take financial advice from their bank has always been tough. Yet explaining the need for whole of market advice vs tied advice usually ensured they avoided this pitfall. On top of that many banks exited the advice market in recent years.
Yet if restricted advice becomes the norm then consumers will find it hard to differentiate between restricted propositions and so will likely just go back to their bank, especially as a number of banks are looking to re-enter the advice market. That would be a disaster!
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