Tim Sargisson: 2016 and all that. A look back at some key issues that caught my eye.
The continuing chronic lack of understanding about risk in our industry.
This is evidenced by the annual reports of our regulators, ombudsman and compensation scheme showing that the total cost of trying to protect people from bad financial advice, deal with complaints and recompense them when bad firms go bust is now an eye-watering £1.4bn a year.
More than a quarter of a billion pounds of that astonishing sum was paid out by the Financial Services Compensation Scheme in 2015/16. That £271m compensated nearly 35,000 people. £77m in regard to bad advice about using pension freedoms to transfer money into a Sipp and hold it in what the FSCS calls “high-risk, non-standard asset classes, which have often become illiquid”. In other words, putting that money into dodgy investments.
This amount only includes bad advice by what the FCA calls “an increasing population of failed adviser firms.” In other words, regulated advisers who then went out of business. It does not include bad advice where the adviser coughs up and stays in business. Nor the probably larger amounts lost to unregulated advisers selling unregulated products outside the FSCS.
In 2016 we learned that Pension freedom really does mean the freedom to make big mistakes, like investing in ethical forestry, Cape Verde property, life settlements or carbon credits. If these investments make money for anyone it is usually the high commissions for the introducers.
Earlier this month TailorMade Independent was the headline act. Between 2010 and 2013, TMI provided advice to over 1,661 customers who invested £112m in unregulated investments such as green oils, biofuels and overseas property with 923 invested in overseas property developments run by Harlequin. According to the FCA, the Financial Services Compensation Scheme has already paid out £40 million in relation to 919 claims.
The FSCS has already warned advisers it may impose an interim levy on life and pension advisers due to an increase in the number of claims related to Sipps. They expect to pay out just over £136 million in relation to claims about Sipp advice in 2016/17, and incur administrative costs of £7 million. This compared to an original estimate of £98 million in pay outs and £5 million in costs. The FSCS therefore reported a £28 million deficit in the life and pension advice section.
This is money that is going out of your business and therefore unavailable for reinvesting back into improving customer service delivery.
FAMR and Roboadvice
What we didn’t see in 2016 was any real progress on the FAMR, in what is supposed to be a leading project to transform the provision of advice.
The FCA’s approach is to conduct its work behind closed doors and hopefully more will be revealed when the FCA and Treasury submit a progress report on the FAMR to Treasury economic secretary Simon Kirby and the FCA board in early 2017.
Despite this, 2016 did see the launch of the FCA’s robo-advice unit and the setting-up of the financial advice working group. There was much discussion in 2016 about robo-advice and the threat posed to the traditional adviser but this commentator sees robo-advice as still being too much of a solution looking for a problem. Robo-advice is viewed as a technological and regulatory challenge, with too little emphasis on a business model and a strategy which seems to be anchored the premise that if we build it, they will come. A report by IRN Consultants in early 2016 into robo-advice showed that most UK robo-advisers such as Nutmeg are likely to be unprofitable for years to come. It estimated that the average UK robo-adviser is making a loss of £162.60 for each new customer in the first year, and making just £17.50 per annum on each account in subsequent years. As a result, SCM has warned that UK robo-advisers are ‘wired’ to lose money and most will go bust before acquiring the sizeable assets under management needed to survive. If nothing else, 2016 highlighted the significant challenges ahead in the world of robo-advice.
Sandringham 2017
The key to our plans is to ensure we remain relevant in the eyes of our partners and customers and continue to grow the business. 2016 represented a significant year of progress with a 44% increase in turnover, compared to 2015 and a 73% increase in gross profit over the same period.
We anticipate closing out the year with 165 partners, a net increase of 53 during the year.
Our plans for 2017 are largely more of the same. To build on the significant IT improvements we made in 2016 and to continue to improve the way we deliver our customer proposition. There is still too much ‘friction’ in financial services, which leads to an increase in the levels of administration to support businesses and an associated increase in costs. We will continue our focus on removing as much friction as we can to reduce costs, improve service delivery and attract new partners. At the same time with a relentless focus on managing and mitigating risk in the business.
Finally, on the subject of risk – my continuing theme for 2017 – here is the (unregulated) advice that opens the first paragraph in Guide to The Unprotected:
“When an inexperienced person comes into possession of their fortune, especially if it be a small one, their first enquiry is ‘how can I invest my money so as to get the highest possible interest?’. Let them rather seek to place it where capital will be safest.”
Written 150 years ago and was 3s 6d very well spent.
Published on 21st April 2016
