Aviva UK: The Value of Financial Advice Report- June 2011

Aviva Report:The Value of Financial AdviceJune 2011

IntroductionAs one of the UK’s largest providers of life insurance, pensionsand long-term investmentsi, Aviva understands that everyone isdifferent and that during their lifetime their financial priorities willdevelop and change.At Aviva, we’re dedicated to ensuring individuals have accessto the best possible financial products for their situation andthe widest possible choice of ways to access them – be it via anindependent financial adviser (IFA), through a high street bank orother partner organisation, through their employer or direct.For financial advisers, who account for around 80% of Aviva’ssales, the next few years are likely to prove a challenge as newregulation in the form of the Retail Distribution Review (RDR) willmean a significant change for the way they work with their clients.We believe this period also provides a great opportunity to developa more customer-focused and sustainable market – and we wantto 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 bestproducts at the best prices, and also in less obvious ways through the emotional value which comes through bespokeprofessional 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 LifeContents ● 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 The Value of Financial Advice 2

Setting the scene –a market overviewThere are estimated to be around 50,000 financial advisers in the UKii, falling into a number of different typesas 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.Adviser population by segment Employee Benefit Consultant Tied IFA (AR) IFA (DA) Wealth Manager Authorised Professional Firm Bank/Building Society Insurance CompanySource: NMG Consulting The Value of Financial Advice 3

Sources of adviceAs part of its ongoing research into consumer finances and the value of financial advice, Aviva carried out asurvey of over 2,000 UK adults. It found the majority of people in the UK (81%) regretted decisions they havetaken with their finances in the pastiv. Among the most common mistakes were issues such as getting intodifficulty with credit cards and taking out expensive loans.A lot of these mistakes occurred when professional financial advice could have prevented them happeningor at least mitigated them. The survey found the majority of people would turn to those closest to themfor advice in the first instance, with 43% of consumers saying they would look to friends and family forguidance. A further 40% would go online to seek advice, 26% say they would go to a bank or buildingsociety and just 21% say they would go straight to an IFA.Sources of Financial Information and Advice 50 An independent financial adviser (IFA) 40 The internet A bank or building society Newspapers or magazinesPercentage (%) 30 Friends or family Other 20 10 0 Sources of Financial AdviceInterestingly, the research found there are clear gender and age differences in terms of who people turn tofor financial advice, with almost half of women questioned saying they would turn to friends or family forfinancial 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 offinancial advice, with 52% of 18-24 year olds claiming it is their primary source of advice compared with just23% of over-65s. Conversely, the likelihood of seeking advice from an IFA increases as people get older andhave 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 hugeamount of financial information in the public domain – it appears most consumers will eventually seekprofessional financial advice before making ‘big ticket’ decisions with their finances. As an example, financialadvisers accounted for 53% of all new mortgages and 59% of remortgages in 2010, according to theCouncil of Mortgage Lenders. The Value of Financial Advice 4

Triggers for visiting an IFAThe 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 toseek advice was for a specific financial transaction (44%), such as taking out a mortgage.Top reasons for making an appointment with an IFA60 Needed general financial advice50 Needed professional advice about a specific transaction Confused about finances in general and wanted help40 Family and friends recommended they sought advice A life event caused them to assess their finances30 Other Employer suggested it2010 0Source: Aviva researchHowever, after visiting an IFA the benefits of professional financial advice can clearly be demonstrated by thechange in attitude of people towards their finances. Aviva’s research found that after visiting an IFA the vastmajority 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% sayingthey 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%). Top benefits reported by people who met with an IFA100 Less confused/benefitted from visit More confident about managing money 80 Happy making the right decisions Secure now theyve a plan in place 60 Better educated about finance Less stressed about the future 40 20 0 Source: Aviva research The Value of Financial Advice 5

The value of an IFAIn addition, a recent independent study carried out on behalf of the Association of Independent FinancialAdvisers (AIFA) supported this, finding 84% of consumers who have actually used financial advisers ratethe quality of advice they receive as ‘excellent’ or ‘very good’, and 98% of consumers who already use theservices of an IFA state they still trust their IFA most to offer financial advicev. Less than one in ten consumersare dissatisfied with the advice they receive from an IFA, and more than four out of five respondents whohave 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% sayingthis 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 providerpays them a fee for placing the product with them) instead of fees paid directly by consumers for the advicegiven. 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 £101to £150 per hour post-RDR – which is comparable to the fees charged by other regulated professionals suchas solicitors and accountantsvi. However, there is still some educational work to be done, as the research fromDeloitte found the average amount consumers are willing to pay for an hour’s advice is just £70. The Value of Financial Advice 6

The impact of the RetailDistribution Review (RDR)In order to address the issue of insufficient consumer trust andconfidence in the products and services supplied by the market,the Financial Services Authority (FSA) will implement newregulation in the form of the RDR from the end of 2012.The aim of the RDR is to increase the level of professionalism inthe sector and increase transparency to the benefit consumers.The scope of the RDR covers all advisers giving investment adviceto customers, but doesn’t apply to those advising on mortgagesor 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 Value of Financial Advice 7

At the moment this commission must be disclosed before a product can be sold, but the new proposals willmean product provider commission will be abolished, and advisers will only be remunerated through fees anda system called ‘adviser charging’. This new system will mean advisers will need to agree, in advance of doingany 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 couldput some people off seeking financial advice as they believe many clients do not fully appreciate the costs offinancial 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 investmentswas worth nothing, with a further 25% saying it was worth less than £200 per hour.How much do consumers think financial advice is worth? More than £1,000 £750-£1,000 £500-£749 £400-£499 £300-£399 £200-£299Price £100-£199 £50-£100 Less than £50 Nothing 0% 10% 20% 30% 40% 50% 60% 70% 80%Source ABI Quarterly Consumer Survey, 2010 Q4 . 2608 consumersAt 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 theywould not pay for advice. This suggests education is needed before consumers appreciate the value offinancial advice and are comfortable paying an upfront fee. The Value of Financial Advice 8

Aviva’s views on the outlookfor 2011 and beyondThere is no doubt the next few years will be a testing time for the financial advisory market as it goesthrough 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 informationavailable to consumers through the internet and other sources, and it would be easy to believe the futurelooks challenging for the financial intermediary market.However, evidence is already building to suggest the market for financial advice will not only survive thesechallenges, but will thrive over the coming years with advisers becoming better qualified, and adding (anddemonstrating) 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 beenclimbing steadily over the last two years, and the number of advisers who believe they are unlikely to betrading in 2013 has dropped to just 10%.Aviva’s research shows that advisers are investing time and money in preparing for their future success, withover two-thirds working towards gaining the further qualifications required, and over half already adoptingadviser charging. Advisers are giving consideration to the type of advice they want to offer in future withtwo-thirds (65%) planning to offer independent advice, 15% saying they will offer a multi-advice model, and6% intending to offer restricted advice. Just 15% say they have not yet decided which type of advice theywant to offer, or that they intend to leave the market.Looking into a crystal ball - What might the market look like after 2012? New RDR Rules Phase 1 Phase 2 Phase 3 RDR implementation planning/activity Distribution turbulence Stabilised worldAdviser/customer numbers Customers see value of Reduction in advice and return to market Less customers likely to customer willingness have an adviser 1.8m to pay for advice New advisers enter industry Likely drop in advisers c 10% (Oxera - FSA commissioned research) 2010-12 2013-15 2016+ TimeWhile there is evidence to indicate that consumers are currently resistant to paying fees, an important reasonfor this is that many do not understand they are paying for advice at the moment. With less than two yearsto go before the RDR, financial advisers and the industry have a great opportunity to educate and prepareconsumers for the transition to paying upfront fees for advice. Indeed, of the adviser firms who are alreadyoperating, or are in the process of moving to fee based charging, many are finding that their clients arecomfortable paying for advice upfront – an encouraging sign. The Value of Financial Advice 9

Of course there are still concerns about the impact the RDR will have on the sector; many advisers remaincautious about the effect on their business of the RDR, with worries centred on the level of qualificationrequired, and the concern that they may lose clients who are unwilling to pay fees. However, the 10% ofadvisers who believe they are unlikely to still be trading in 2013 represent a relatively small proportion ofthe market. With a higher level of qualification bringing a greater level of professionalism, recent graduatesfacing 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 advisersleaving the profession by 2013 is likely to lead to a period which will see fewer consumers wanting, orable to access professional financial advice. This may not make much of a difference for simple, low-risktransactions such as the purchase of a cash ISA. But for significant, higher risk decisions like choosing apension, investment or annuity, there is the potential for people to make decisions without advice that theymay later regret.Longer term though, the future looks bright for the financial intermediary market. The emergence of a moreprofessional, better qualified industry and clear transparent charges for financial advice can only be a goodthing for consumers. The Value of Financial Advice 10

Additional data sources:RDR Barometer – Wave 9, AvivaHot issues Tracker, Wave 2, AvivaResolution Foundation Report: the Advice Gain – the impact of generic financial advice on the financial servicesindustry: March 2007IFA Promotion Enquirer Research: August 2007Deloitte: Face to face with the future, 14 July 2010AIFA Member Client Research: September 2007The cost of implementing the RDR professional policy changes, NMG Consulting, June 2010AIFA/NMG: Financial Advice: Worth the Money?References:i With a market share of around 10.5% in August 2010. Aviva figuresii Retail investment advisers - The cost of implementing the RDR professional policy changes, section 3, NMG Consulting, June 2010 page 19iii The cost of implementing the RDR professional policy changes, NMG Consulting, June 2010 page 21iv Aviva survey carried out by Opinion Matters between 25 November and 9 December 2010v AIFA/NMG: Financial Advice: Worth the Money. Page 4vi Aviva RDR Insights – Shaking up our market, October 2010vii ABI Quarterly Consumer Survey, 2010 Q4 Page 8For further information on the report or for comment, please contact Jess Geoghegan at the Aviva Press Office on+44 (0)1904 684128 or jess.geoghegan@aviva.co.uk The Value of Financial Advice 11

Aviva UK: The Value of Financial Advice Report- June 2011

by Aviva plc

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Aviva UK: The Value of Financial Advice Report- June 2011 Document Transcript