Mistrust in Financial Services: Why Aren’t Savers Taking Advice?
After decades of scandal and opaque practices, research shows that trust in financial services is troublingly low among adults.
Andrew Megson, Executive Chairman at My Pension Expert, looks at the sources of distrust in financial services and how the industry can turn its image around.
Today, the topic of trust in financial services looms large. With decades of mis-selling PPI, investment scandals, and zero industry transparency, it is little wonder that many individuals have a hard time engaging with financial advisers.
This is a crying shame. Advisers play a vital role in helping people develop a tailored financial strategy and achieve their monetary goals – the current climate of economic volatility has only accentuated their importance.
The financial pressures brought on by COVID-19 have upended many people’s financial strategies. Individuals have been forced to dip into their savings or, in some cases, even bring forward their retirement date due to redundancy. Naturally one would assume that it would pay to consult a professional when re-evaluating retirement and investment strategies.
Yet, Britons are still reluctant to seek advice. According to research from My Pension Expert less than two thirds (38%) of UK adults ever sought the help of an IFA. Even amongst those aged 55-plus and approaching retirement age, this figure stands at only 46%.
Such figures are concerning. They suggest that many people are making complex financial decisions unaided. And without an in-depth knowledge of the industry, or various financial products, they might find themselves worse off in the long term. Clearly, urgent action is needed.
Re-tracing the history of adviser fees
Adviser practices have certainly been questionable over the years, with little to no transparency surrounding how adviser fees were calculated, and many individuals in the industry working on commission and resorting to pushy sales tactics.
With decades of mis-selling PPI, investment scandals, and zero industry transparency, it is little wonder that many individuals have a hard time engaging with financial advisers.
Worryingly, My Pension Expert’s aforementioned survey revealed that almost one in five (18%) of individuals lost money following the recommendations of a financial adviser in the past. Likewise, a further 26% of UK adults said that they felt pressured into purchasing a financial product, despite not fully understanding what it was. And it these negative experiences that have shaped Britons’ opinion of advisers.
Thankfully, in 2012 the FCA took action to tackle unethical practices with the retail distribution review (RDR). This means that IFAs are now only able to offer fee-based advice.
But in spite of the great strides made by the FCA, the regulatory changes have not been enough to mend savers’ relationships with intermediaries. Indeed, many are steadfast in their belief that financial advisers will not act in their best interests.
Too much choice can be a bad thing
As a consequence of such deep-rooted mistrust, many people prefer to make their own decisions about how to handle their pensions and investments.
This is troubling, as there are such a vast array of savings and investment products on the market for savers to choose from, individuals may fall victim to rushed and ill-informed decisions.
Indeed, too much choice can sabotage the ability to make well-reasoned and logical decisions. Research in academic settings, including a notable study conducted by Columbia University suggests that this is the case, as the group of subjects with more choices made knee-jerk decisions, compared those with fewer choices, who made their choices based on greater reason and individual preference.
Apply these insights to the world of financial planning, and problems start to rear their head. Our survey uncovered that the majority (65%) of individuals prefer to free guidance that can be found online, instead of seeking out independent financial advice. And although many will have a good grasp of their finances, relying solely on self-governed advice can be particularly harmful in the long-term.
Repairing broken bonds
Clearly, the industry needs to do more to repair its damaged reputation.
In addition to the FCA’s work, a good start in this regard would be for the regulatory body to make the benefits of independent financial advice more widespread. Take for example, the fact that regulated financial advisers are obligated to reinstate an individual’s original financial position if their advice leaves them worse off. Few savers know this, and many might be more willing to take advice safe in this knowledge.
Further to this, the results of My Pension Expert’s survey suggests that individuals also want to see the FCA come down even harder on unscrupulous advisers, with the overwhelming majority (78%) of respondents stating that they wanted to see harsher punishments for IFAs engaging in unethical practice. Meanwhile, a similar number (73%) believe that tighter regulations surrounding independent financial advice are in order.
Ultimately, the financial services industry has some work to do when it comes to restoring its reputation. Particularly as the UK progresses along on its roadmap out of lockdown and the economy eventually stabilises, savers are likely to remain in need of regulated financial advice. Although it will not happen overnight, so long as the industry takes steps to improve transparency and public understanding, I have every confidence that individuals will be more willing to seek advice to secure their financial futures.