Aviva Report: The Value of Financial Advice - June 2011€¦ · Aviva’s views on the outlook for 2011 and beyond – page 9 Additional data sources and references – page 11 As

Aviva Report:The Value of Financial AdviceJune 2011

VAL_REP_V1_31333_BRO.indd 1VAL_REP_V1_31333_BRO.indd 1 02/06/2011 16:0802/06/2011 16:08

Introduction

The Value of Financial Advice 2

Contents

● Setting the scene – a market overview - page 3

● Sources of advice – page 4

● Triggers for visiting an IFA – page 5

● The value of an IFA – page 6

● The impact of the Retail Distribution Review (RDR) – page 7

● Aviva’s views on the outlook for 2011 and beyond – page 9

● Additional data sources and references – page 11

As one of the UK’s largest providers of life insurance, pensions and long-term investmentsi, Aviva understands that everyone is different and that during their lifetime their financial priorities will develop and change.

At Aviva, we’re dedicated to ensuring individuals have access to the best possible financial products for their situation and the widest possible choice of ways to access them – be it via an independent financial adviser (IFA), through a high street bank or other partner organisation, through their employer or direct.

For financial advisers, who account for around 80% of Aviva’s sales, the next few years are likely to prove a challenge as new regulation in the form of the Retail Distribution Review (RDR) will mean a significant change for the way they work with their clients. We believe this period also provides a great opportunity to develop a more customer-focused and sustainable market – and we want to see financial advisers survive and thrive over the coming years.

At Aviva, we strongly believe that IFAs provide value to consumers, both in tangible ways by securing the best products at the best prices, and also in less obvious ways through the emotional value which comes through bespoke professional advice and support.

The purpose of this report is to start the debate on the value IFAs provide to consumers and how they can best do this.

Graham Boffey, Distribution Director, Aviva, UK Life


Setting the scene – a market overview


There are estimated to be around 50,000 financial advisers in the UKii, falling into a number of different types as defined by the advice they are able to offer consumers. The main styles are listed below:

● Independent financial advisers (IFAs): Of the financial advisers operating in the UK, around half of these (54% or almost 26,000)iii are thought to be independent financial advisers (IFAs). These can be split into two groups:

1. Those who are Directly Authorised by the FSA are able to offer whole of market advice across a range of financial services products.

2. And those who are Appointed Representatives of another firm, known as a network. They may be able to offer whole of market advice or be limited to a representative panel of product providers – but still wide enough to be called whole of market. These advisers are authorised by their network rather than directly by the FSA.

● Multi-tied advisers: These are advisers who work for a financial institution and are not able to offer advice on a whole of market basis; rather they are limited to advising on a smaller range of products from a smaller range of providers.

● Tied advisers: These are advisers who are employed directly by a bank or building society and are generally limited to just selling the products of that particular bank or building society. Their focus tends to be on investment business and sometimes pension business as well. However, around 25% of bank and building societies’ sales are made via their IFA operations. IFAs tend to focus on the more high net worth end of the market.

Advisers working for an insurance company are usually tied into offering products from their own company. However, they can usually advise on a range of other non-insurance related financial products too.

Employee Benefit Consultant

Tied

IFA (AR)

IFA (DA)

Wealth Manager

Authorised Professional Firm

Bank/Building Society

Insurance Company

Source: NMG Consulting

Adviser population by segment


As part of its ongoing research into consumer finances and the value of financial advice, Aviva carried out a survey of over 2,000 UK adults. It found the majority of people in the UK (81%) regretted decisions they have taken with their finances in the pastiv. Among the most common mistakes were issues such as getting into difficulty with credit cards and taking out expensive loans.

A lot of these mistakes occurred when professional financial advice could have prevented them happening or at least mitigated them. The survey found the majority of people would turn to those closest to them for advice in the first instance, with 43% of consumers saying they would look to friends and family for guidance. A further 40% would go online to seek advice, 26% say they would go to a bank or building society and just 21% say they would go straight to an IFA.

Interestingly, the research found there are clear gender and age differences in terms of who people turn to for financial advice, with almost half of women questioned saying they would turn to friends or family for financial advice (49%) compared with a third of men (34%).

Age divide:And perhaps unsurprisingly, among younger age groups the internet is now the most popular initial source of financial advice, with 52% of 18-24 year olds claiming it is their primary source of advice compared with just 23% of over-65s. Conversely, the likelihood of seeking advice from an IFA increases as people get older and have more assets. While 9% of 18-24 year olds would seek out an IFA when making key financial decisions, this proportion increases to 28% of over-65s.

Despite the fact that people are increasingly researching products themselves – facilitated by the huge amount of financial information in the public domain – it appears most consumers will eventually seek professional financial advice before making ‘big ticket’ decisions with their finances. As an example, financial advisers accounted for 53% of all new mortgages and 59% of remortgages in 2010, according to the Council of Mortgage Lenders.

Sources of advice


An independent financial adviser (IFA)

The internet

A bank or building society

Newspapers or magazines

Friends or family

Other

Sources of Financial Information and Advice

Perc

enta

ge

(%)

Sources of Financial Advice0

10

20

30

40

50



The Aviva survey found the main reason people choose to use an IFA is to seek general financial advice (56%), although again there are differences between the sexes, as the largest single reason for women to seek advice was for a specific financial transaction (44%), such as taking out a mortgage.

However, after visiting an IFA the benefits of professional financial advice can clearly be demonstrated by the change in attitude of people towards their finances. Aviva’s research found that after visiting an IFA the vast majority of people (95%) reported feeling less confused/felt they had benefitted. Many people said they felt “more confident” about managing their money after meeting with an IFA (44%), with a further 42% saying they felt as if they were “making the right financial decisions”.

Other positive reactions to visiting an IFA were: feeling secure about having a financial plan in place (28%), feeling better educated about finance (20%), and feeling less stressed about the future (10%).

Needed general financial advice

Needed professional advice about a specific transaction

Confused about finances in general and wanted help

Family and friends recommended they sought advice

A life event caused them to assess their finances

Other

Employer suggested it

Top reasons for making an appointment with an IFA

Source: Aviva research

0

10

20

30

40

50

60

Less confused/benefitted from visit

More confident about managing money

Happy making the right decisions

Secure now they've a plan in place

Better educated about finance

Less stressed about the future

Top benefits reported by people who met with an IFA

Source: Aviva research

0

20

40

60

80

100

Triggers for visiting an IFA


In addition, a recent independent study carried out on behalf of the Association of Independent Financial Advisers (AIFA) supported this, finding 84% of consumers who have actually used financial advisers rate the quality of advice they receive as ‘excellent’ or ‘very good’, and 98% of consumers who already use the services of an IFA state they still trust their IFA most to offer financial advicev. Less than one in ten consumers are dissatisfied with the advice they receive from an IFA, and more than four out of five respondents who have used an IFA say they would use the same IFA again.

Recent ABI research backs this up, finding that IFAs are the most trusted source of advice, with 26% saying this was the case. Friends/family (19%) and the Citizens Advice Bureau (18%) follow.

At present most advisers are remunerated by commission or procuration fees (whereby the product provider pays them a fee for placing the product with them) instead of fees paid directly by consumers for the advice given. In terms of how much this advice actually costs, research from Deloitte suggests IFAs are paid around £105 per hour for advising on life, pension, savings and investment products.

Separate research carried out by Aviva supported this, with 39% of IFAs expecting to charge between £101 to £150 per hour post-RDR – which is comparable to the fees charged by other regulated professionals such as solicitors and accountantsvi. However, there is still some educational work to be done, as the research from Deloitte found the average amount consumers are willing to pay for an hour’s advice is just £70.


The value of an IFA


In order to address the issue of insufficient consumer trust and confidence in the products and services supplied by the market, the Financial Services Authority (FSA) will implement new regulation in the form of the RDR from the end of 2012.

The aim of the RDR is to increase the level of professionalism in the sector and increase transparency to the benefit consumers. The scope of the RDR covers all advisers giving investment advice to customers, but doesn’t apply to those advising on mortgages or general insurance. The three main areas of focus are:

● Qualification Standards – The current rules mean financial advisers need to hold a qualification which is broadly equivalent to an A-level – Qualifications and Credit Framework (QCF) Level 3. The new requirements however will mean advisers need to be qualified to QCF Level 4, which is Diploma standard, or equivalent to the first year of a degree.

● Scope of Advice – The RDR will require advisers to describe their advice as independent, restricted, or simplified prior to actually providing advice. Independent advice is that which is unbiased and based on a comprehensive and fair analysis of the relevant market and all products. If they cannot meet these requirements then they are giving restricted advice. This differs from simplified advice, which is a middle ground between advice and sales, aimed primarily at lower income clients with basic needs although the same qualification requirements and adviser charging rules are applicable all three forms of advice.

● Paying for advice – There are currently three main ways of paying for financial advice (although not all advisers offer all these options).

1. Fees – the client pays the adviser a fee at an hourly rate or a set fee (see above).

2. Commission – the client pays indirectly through commission whereby the fees are paid by the product provider to the adviser, and deducted from the sum invested by the client.

3. Fees and commission – the client pays a combination of fees and commission.

The impact of the Retail Distribution Review (RDR)



At the moment this commission must be disclosed before a product can be sold, but the new proposals will mean product provider commission will be abolished, and advisers will only be remunerated through fees and a system called ‘adviser charging’. This new system will mean advisers will need to agree, in advance of doing any work for their client, just how much they will charge them for their services.

There are concerns among advisers that this switch to charging consumers an explicit fee for advice could put some people off seeking financial advice as they believe many clients do not fully appreciate the costs of financial advice. Their concerns are backed up to a certain degree by the Association of British Insurers (ABIvii, which found two-thirds of individuals (65%) thought financial advice on pensions, saving and investments was worth nothing, with a further 25% saying it was worth less than £200 per hour.

At the end of 2010, the ABI asked consumers how they would prefer to pay for advice and found 13% said they would prefer an up-front fee, with another 13% preferring to see advisers paid by commission. A further 13% did not know how they would prefer to see advisers paid, but the majority (61%) said they would not pay for advice. This suggests education is needed before consumers appreciate the value of financial advice and are comfortable paying an upfront fee.


More than £1,000

£750-£1,000

£500-£749

£400-£499

£300-£399

£200-£299

£100-£199

£50-£100

Less than £50

Nothing

How much do consumers think financial advice is worth?

Source ABI Quarterly Consumer Survey, 2010 Q4 . 2608 consumers

0% 10% 20% 30% 40% 50% 60% 70% 80%

Pric

e


There is no doubt the next few years will be a testing time for the financial advisory market as it goes through one of the biggest changes it has ever faced when RDR comes into force at the end of 2012. Add in the continuing difficult economic conditions in the UK, and the wealth of financial information available to consumers through the internet and other sources, and it would be easy to believe the future looks challenging for the financial intermediary market.

However, evidence is already building to suggest the market for financial advice will not only survive these challenges, but will thrive over the coming years with advisers becoming better qualified, and adding (and demonstrating) even greater value for clients.

Aviva’s IFA research shows that advisers are getting to grips with the challenges of RDR. More than three-quarters (76%) of advisers believe they will still be in business on 1 January 2013. This figure has been climbing steadily over the last two years, and the number of advisers who believe they are unlikely to be trading in 2013 has dropped to just 10%.

Aviva’s research shows that advisers are investing time and money in preparing for their future success, with over two-thirds working towards gaining the further qualifications required, and over half already adopting adviser charging. Advisers are giving consideration to the type of advice they want to offer in future with two-thirds (65%) planning to offer independent advice, 15% saying they will offer a multi-advice model, and 6% intending to offer restricted advice. Just 15% say they have not yet decided which type of advice they want to offer, or that they intend to leave the market.

Looking into a crystal ball - What might the market look like after 2012?

While there is evidence to indicate that consumers are currently resistant to paying fees, an important reason for this is that many do not understand they are paying for advice at the moment. With less than two years to go before the RDR, financial advisers and the industry have a great opportunity to educate and prepare consumers for the transition to paying upfront fees for advice. Indeed, of the adviser firms who are already operating, or are in the process of moving to fee based charging, many are finding that their clients are comfortable paying for advice upfront – an encouraging sign.


Aviva’s views on the outlook for 2011 and beyond

2010-12 2013-15

Time

Ad

vise

r/cu

sto

mer

nu

mb

ers

2016+

Phase 3Stabilised world

Phase 2Distribution turbulence

New RDR Rules

Phase 1RDR implementation planning/activity

Customers see value of advice and return to market

New advisers enter industry

Reduction in customer willingness to pay for advice

Less customers likely to have an adviser 1.8m

Likely drop in advisers c 10% (Oxera - FSA commissioned research)



Of course there are still concerns about the impact the RDR will have on the sector; many advisers remain cautious about the effect on their business of the RDR, with worries centred on the level of qualification required, and the concern that they may lose clients who are unwilling to pay fees. However, the 10% of advisers who believe they are unlikely to still be trading in 2013 represent a relatively small proportion of the market. With a higher level of qualification bringing a greater level of professionalism, recent graduates facing an uncertain jobs market may well increasingly consider a career in financial advice.

Nevertheless, the combination of upfront fees for advice being introduced, plus a proportion of advisers leaving the profession by 2013 is likely to lead to a period which will see fewer consumers wanting, or able to access professional financial advice. This may not make much of a difference for simple, low-risk transactions such as the purchase of a cash ISA. But for significant, higher risk decisions like choosing a pension, investment or annuity, there is the potential for people to make decisions without advice that they may later regret.

Longer term though, the future looks bright for the financial intermediary market. The emergence of a more professional, better qualified industry and clear transparent charges for financial advice can only be a good thing for consumers.



Additional data sources:RDR Barometer – Wave 9, Aviva

Hot issues Tracker, Wave 2, Aviva

Resolution Foundation Report: the Advice Gain – the impact of generic financial advice on the financial services industry: March 2007

IFA Promotion Enquirer Research: August 2007

Deloitte: Face to face with the future, 14 July 2010

AIFA Member Client Research: September 2007

The cost of implementing the RDR professional policy changes, NMG Consulting, June 2010

AIFA/NMG: Financial Advice: Worth the Money?

References:i With a market share of around 10.5% in August 2010. Aviva figures

ii Retail investment advisers - The cost of implementing the RDR professional policy changes, section 3, NMG Consulting, June 2010 page 19

iii The cost of implementing the RDR professional policy changes, NMG Consulting, June 2010 page 21

iv Aviva survey carried out by Opinion Matters between 25 November and 9 December 2010

v AIFA/NMG: Financial Advice: Worth the Money. Page 4

vi Aviva RDR Insights – Shaking up our market, October 2010

vii ABI Quarterly Consumer Survey, 2010 Q4 Page 8

For further information on the report or for comment, please contact Jess Geoghegan at the Aviva Press Office on +44 (0)1904 684128 or [email protected]


VAL_REP_31333 05/2011 © Aviva plc


Aviva Report: The Value of Financial Advice - June 2011€¦ · Aviva’s views on the outlook for 2011 and beyond – page 9 Additional data sources and references – page 11 As

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