As founder of my own financial planning business and a former head of investments at several banks, I have observed a troubling trend: the pervasive confusion and misuse of key financial terms. This miscommunication is not always intentional, but it is certainly problematic, particularly when it comes to regulated retail investments. The overemphasis on selling these investments has skewed the understanding and application of crucial concepts such as advice, guidance, and holistic planning.
Advice vs. Guidance: A Clear Distinction
In the banking sector, when we talk about “advice,” it usually refers to the advised sale of regulated investments. This involves personalised recommendations tailored to the client’s financial situation and goals. However, many professionals mistakenly conflate this with “guidance,” which is actually about non-advised sales. Guidance provides general information and options without steering clients towards specific investment products.
This distinction is critical. Advice implies a fiduciary duty, requiring a deep understanding of the client’s needs and a commitment to act in their best interest. Guidance, on the other hand, offers a more hands-off approach, leaving the final decision to the client without personalised recommendations.
Both advice and guidance in this context is selling investments.
Information and Education: Not Just About Sales
The terms “information” and “education” within banks often narrowly focus on regulated retail investment sales. This perspective is limiting and overlooks the broader scope of financial literacy. True financial education should empower consumers to understand their entire financial landscape, not just the products banks want to sell. It should increase their capability, literacy, and confidence, allowing them to take control of their own finances.
The Misunderstood Concept of Holistic Financial Planning
The banking industry’s definition of “holistic” is equally troubling. Often, it is used to describe a narrow focus on investment sales rather than a comprehensive approach to financial well-being. Genuine holistic financial planning encompasses all aspects of a client’s financial life, including life planning, cashflow planning, income generation, expense management, budgeting, debt management, insurance, retirement planning, estate planning, tax planning, and more. It is about creating a sustainable financial future, not just selling investment products.
The Advice Gap and Its Implications
The “advice gap” refers to the segment of the market that banks do not serve with advised sales because their wealth is below a certain threshold, typically £500,000. This self-imposed limit excludes a vast number of individuals who could benefit from financial advice. Banks see our definition of holistic financial planning as extra work without the incentive of investment sales, thus deeming it pointless.
However, this view is myopic. Holistic financial planning, which involves no product sales, constitutes 99% of effective financial management. 1% of the conversaton might relate to the purchase of a regulated investment. The commoditisation of the retail investment market means low-cost, well-diversified investments are readily available without intermediaries. Therefore, the role of financial planners should shift towards empowering clients rather than pushing products.
The Role of Education and Financial Literacy
Education should not aim to make clients delegate control to banks but to assume ownership of their financial decisions. This means creating a clear separation between planners and products. Planners should act as fiduciaries, maintaining integrity and trust in the financial planning process. This approach is crucial for restoring faith in the financial system and ensuring that consumers are genuinely served. Educators should not have a license to sell.
The Future of Financial Support from Banks
There is a clear opportunity for banks to do more for those in the advice gap. Barclays highlights the need for holistic guidance and the potential for regulatory changes to allow banks to broaden their support. However, the industry’s focus remains on how to make advice more accessible within the confines of current regulations, often still tied to the concept of investment sales.
Conclusion
The financial industry’s future lies in rethinking its approach to advice, guidance, and holistic planning. By shifting the focus from sales to education and empowerment, banks can better serve their clients and rebuild trust. True holistic financial planning is about more than just investments; it’s about guiding clients towards financial independence and security. To achieve this, there must be a fundamental change in how financial advice is perceived and delivered.
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