In preparation for the new financial advice regime that starts in January 2013, advisers across the country are preparing to dump their unprofitable clients. If you have investments worth less than £500,000, this could be you.
In the past, under the commission-based advice regime, many advisory businesses have been happy to serve a large cross section of society. But from January commission is banned, meaning advisers have to change their business models, to charge clients fees. The added pressures of the new regulatory regime - called the Retail Distribution Review (RDR) - mean firms will have to jump through hoops to make sure that the type of service they offer is particularly suited to their clients.
So a professional adviser who charges £250 an hour is unlikely to take on a client who has £50,000 to invest. Some private banks have set their limits at half a million pounds, managing out wealthy clients who no longer meet their new criteria. Those who have less money are turning to independent financial advisers and high-street banks for advice but these types of advice are becoming scarcer.
The latest big gun to pull out of the financial advice market is Lloyds Banking Group, which is to axe its mass-market investment advice service from November. Barclays Bank has already pulled out of the face-to-face advice market, moving to selling investment products over the internet. This adds weight to conservative peer Lord Flight's prediction that the Retail Distribution Review would leave clients with less than £100,000 to invest without access to advice. (Read his letter to the Financial Times here.)
The banks' decision to withdraw from the advice market is a response to industry research that shows mass-market investors have no appetite for paying fees for independent advice - up until now they have paid via commission on products, but the new advice regime will stop this. According to research by JPMorgan Asset Management, only 13 per cent of investors with a household income of more than £50,000 will consider paying for regular advice when the new rules start.
We have witnessed a fall from 212,000 individuals licensed to sell financial products in the UK in 1991 to around 50,000 individuals today
Lee Robertson, chief executive officer at wealth manager Investment Quorum, says: "It is estimated that the UK savings ratio has dropped to 3 per cent from 11 per cent back in the early 1990s.
"Against this backdrop, we have witnessed a fall from 212,000 individuals licensed to sell financial products in the UK in 1991 to around 50,000 individuals today, with some 26,000 of these IFAs looking further upmarket for clients.
"We are struggling as an industry to find a solution to the growing savings gap. The hugely costly Money Advice Service is unproven and has launched to unfortunate publicity. The regulator seems unwilling to reduce regulator standards for simplified advice - which is discouraging entrants. And now the banks, which were tipped to benefit from RDR after fierce lobbying, are also abandoning a mass market desperately in need of advice, most likely due to the inability to make a nil commission model work."
In the meantime, according to Legal & General, 95 per cent of IFAs believe their clients are increasingly experimenting with DIY investing. Alongside this, there is a grudging acknowledgment that retail financial consumers are becoming more financially knowledgeable - in 2011, 79 per cent of IFAs thought this increase in DIY investing would lead to unsuitable investments, but by this year, the figure had fallen to 68 per cent.
All of these factors mean advisory businesses are starting to jettison unprofitable clients and to focus exclusively on those who add most value to the business. Some clients of stockbrokers and investment advisers have already received letters or phone calls saying 'You're dumped'. Between now and January there is a chance this could happen to you too.
FSA FINAL GUIDANCE
After 31 December 2012:
Firms holding themselves out as independent must offer truly independent advice that covers all products suitable for their clients. They will not be incentivised to recommend one product over another. A consumer seeking investment advice will understand the kind of service they are getting from their adviser.