How do financial advisers win consumer trust?
"It is widely accepted that a lack of consumer confidence in parts of the
financial services industry is now deterring many households from saving as
much as they might otherwise chose to do". A stark conclusion from the
Treasury Select Committee, as topical now as when it was written in July
2004. Then, the misselling of endowment mortgages and split capital
investment trusts were in the headlines. A decade on, we have seen the
biggest financial crisis in a lifetime, and still the scandals keep coming: PPI
misselling, bankers' bonuses, Libor rigging, and more.
Dissatisfaction with one part of the industry, or wrongdoing by a few firms, can
taint consumers’ views of the industry as a whole, whether this is justified or
not. There is some good news for the financial advice community here:
advisers and brokers are the most trusted type of institution, followed by
building societies1.But the bottom line is that people are more likely to trust
the ability and expertise of their financial institutions, than believe the
institution has their best interests at heart2. This echoes pre-crisis findings by
the Financial Services Consumer Panel (FSCP), when less than a third of
consumers agreed that financial services firms put customers first3.
People tend to trust their own institution more than financial institutions in
general. There are also differences between groups of consumers: in general,
those with the lowest incomes trust financial institutions the least.
Firms want consumers to trust them so they can sell more products and
services. Nothing wrong with that: firms are there to make a profit. What
breeds mistrust is when the industry dresses up the message in rhetoric
about, for example, the nation not saving enough. Consumers know the
motivation is selling. They have also seen enough misselling headlines to
think they may well be sold something they don’t want or need, but often lack
the financial literacy skills or confidence to make their own judgments. Their
suspicions are confirmed by an industry that seems incapable of talking in
plain language. So they ask friends or family for advice, buy the wrong thing,
or buy nothing.
The Retail Distribution Review (RDR) should have made a big difference to
consumer attitudes. Yet a Personal Finance Society survey4 found that less
than a third of people who had not taken professional advice were aware of
the new emphasis on professionalism and transparency. Nearly half of these
‘unadvised’ consumers, and over a third of those who had taken advice said
they did not have trust and confidence in the sector.
1http://www.nottingham.ac.uk/business/businesscentres/crbfs/documents/researchreports/paper77.pdf
- all data 2010Q3
2 Ibid.
3 Consumer Confidence in the Financial Services Industry, Consumer Panel Research Paper 2/2005.
http://www.fs-cp.org.uk/publications/pdf/confidence.pdf
4 The RDR and Consumers 2014.
http://www.cii.co.uk/media/5139793/pfs_rdr_consumer_report_feb2014.pdf
It does not help that some firms seem to see regulation as something to be
challenged or evaded. Successive FCA reviews of RDR implementation have
found problems, for example, the use of ‘in kind’ inducements to advisers to
sell particular products, and failure to disclose costs fully. How can firms
expect to be trusted when they demonstrate repeatedly that they are not
trustworthy?
In conclusion, it seems fair to say that not much has changed in the past
decade or so across the industry, although we have not yet seen the full
impact of a dedicated conduct regulator.
For the future, the biggest change is likely to be an increase in online sales.
Many consumers prefer to buy this way, and that is fine so long as people
understand what they are buying and at what price, and the risks of ‘execution
only’. The FSCP found big problems with online annuity sales5, including lack
of information and ‘hidden’ commissions. These conclusions read across to
online investment sales.
The pensions liberation and ‘guidance guarantee’ announced in the 2014
Budget will make a big difference to the retail investment market. The
changes are also an opportunity for the advice sector to demonstrate that it
can put consumers at the heart of its business. Not everyone approaching
retirement will want or need professional advice, but many will.
So, what do consumers want? First, people need to feel their adviser is ‘on
their side’. They need to understand when they are being advised (in the
common usage of the word) and when they are being sold a product. People
want straightforward products that they can understand, simple choices, and
no jargon. They want to understand what, exactly, they are getting for their
money and, ideally, to be able to judge the performance of their adviser.
Both manufacturers and distributors have a role here, to design products that
people want to buy, and sell them in an open and transparent way. This would
go a long way towards engaging people who currently regard personal
finance as scary or boring. Financial education can play a part – and future
generations will leave school with financial literacy skills, a big plus – but it
can’t do the job on its own.
Finally, advice needs to be more flexible. Regulated advice is clunky and
confusing, with labels like ‘independent’ and ‘restricted’, which do not
resonate with consumers. At the time of writing, the FCA was consulting on
clarifying the boundaries of regulated advice6. This should lead to more ‘fit for
purpose’ models, built around consumers’ needs.
5 http://www.fs-cp.org.uk/publications/pdf/annuities%20position%20paper%2020131203.pdf
6 http://www.fca.org.uk/your-fca/documents/guidance-consultations/gc14-03