Regulatory initiatives designed to protect consumers could drive some advisers to play it too safe with their clients by concentrating on lower risk products, and could also leave some without access to advice as prices increase, according to a new report from KPMG.
Tom Brown (pictured), European head of investment management at KPMG, says: “At at a time when the economy and government need people to be building retirement pots, many everyday investors are being steered towards lower risk investments or are shunning financial advice altogether. Whilst lower risk strategies will be appropriate for many clients, particularly those at, or near retirement, there will be clients who are at a stage of life when they could be taking more risk with some of their investments, to improve longer term rewards and meet their retirement aspirations. The long term policy impact on 2030 retirees, who are now in their 40s and should be building their long-term savings, could be significant.
“Our research found that many financial advisers fear being punished by the regulator for mis-selling riskier products. As a result they may be over-cautious and inadvertently provide the wrong advice to some investors. An appropriate and well-managed level of risk is essential to all long term investment strategies, as the typical investor wants the chance of a better rate of return on their investment portfolio than they could get from their regular savings account. If regulation steers financial advisers to offer lower risk products across the board, we may end up with a situation where investors must either save more or accept that they will be disappointed with their long-term returns.
“While there is undoubtedly merit in policy makers introducing greater transparency and accountability to the sector, there is a risk of unintended consequences for some. The broader impact on wider structural investment into the economy is also relevant.”
The report, UK wealth management at the tipping point?, also discusses how the rising cost of financial advice is encouraging younger investors in particular to shun professional advice and manage their own portfolios, which is not necessarily in their best interests.
Brown says: “Previous KPMG/YouGov research suggests that consumers don’t want to pay for financial advice, with GBP50 being the usual cap most people will pay. It is concerning that many everyday investors don’t use or see the value of financial advice, and on the whole are unwilling to pay for it. As the onus is increasingly left to the individual to make provisions for their long-term savings, it is alarming that people are likely to spend more on a plumber than on financial advice, which could set them up for retirement.”
The report also highlights the significant cost pressures facing the industry, with KPMG predicting that increasing costs could discourage new entrants and force some firms to exit the sector.
Tom Brown says: “Since 2008 – for the first time in 20 years – costs are rising faster than revenues and we predict that if revenues fall by another 15%, close to one third of wealth managers will be making a loss. As profitability is challenged, it is inevitable that businesses will be passing on the some additional costs to clients, which will unfortunately further discourage investors from getting financial advice.”