Generic Financial Planning is financial planning without financial intermediation.
Financial planning is determining a person's or firm's financial needs or goals for the future and the means to achieve them.
Financial intermediation is being an appointed agent of one or several product providers and deciding which investment products would be most suitable under both personal and broader economic circumstances.
A generic financial planner who is not a financial intermediary.
Some financial intermediaries have set up a separate financial planning process or firm. Where financial planning is offered for a fixed fee and is not conditional on financial intermediation, such services can be equivalent to generic financial planning, provided that there is a wall between planning and product distribution. You can have one service and not the other.
It is challenging to consider financial planning as truly "independent" where the financial planner is also the intermediary. Here the client needs to satisfy themselves that there is "blue water" between planning and product distribution. For example, financial planning is not separate where it is conducted with a view to financial intermediation; there is inadequate signposting to direct-to-consumer channels or where the adviser's remuneration is conflicted.
We don't think so. And it's not just because of the conflict of interest between planning and product sale. The argument that consumers have more protection getting financial planning from investment advisers does not stack up.
If an FCA-regulated adviser recommends a product, there is a degree of protection. If you have been mis-sold a product, you can raise a complaint to the adviser's firm seeking redress. If the firm does not find it in your favour, you can complain to the Financial Ombudsman Service. However, you do not have a Private Right of Action to raise matters relating to a breach of regulatory principles through the courts.
If the adviser's firm has professional indemnity cover, the insurers will pay the extent of your upheld claim in part or whole. Though firms are obliged to have PI cover in place, this is not always the case in practice. If a firm defaults without insurance, you can refer your redress claim to the Financial Service Compensation Scheme. At FSCS, limits apply. For example, the lifeboat scheme covers only the first £85,000 of investment claims.
A generic financial planner never recommends a product.
The answer varies slightly from one market to the next, depending on the regulator takes later in the country of origin. Let me explain from a United Kingdom perspective.
For some years now, the retail investment market has been commoditised. That is, there is little to differentiate between the money management systems that consumers can access directly and those operated by distributors who tap into the assets for their fees.
In the words of Christopher Woolard, the Interim CEO of the UK's Financial Conduct Authority (FCA) in September 2020:
"The overwhelming majority of retail investors are best served by readily understood, well-diversified and low-cost investments already available from a range of providers, but many retail investors don't choose these."
Investment intermediation, like investment returns, is now commoditised. What used to take financial intermediaries 15 hours to do for a large percentage of your life savings (3% plus 1% per annum, say) can now be done in 15 seconds for no initial charge whatsoever and a smaller annual percentage charge (0.5% per annum).
Cost savings over a lifetime can be significant.
Sometimes financial intermediaries claim to offer far more than essential financial intermediation for the price. Though that might be the case, the additional work they do is advice-only financial planning and can be done for a fixed flat fee that is reasonable relative to the benefits provided.
In May 2021, the FCA added,
"Firms (financial intermediaries) offering the same charging structure to all consumers may also not provide fair value. Whilst it may often be fair to do this, it may not always be fair where, for example, servicing fees are charged as a percentage of the value of a product (this might be about the size of a loan, investments, or savings). Some consumers may pay substantially larger fees in this way, even though the costs of providing the service and the benefits consumers receive may be remarkably similar. In such circumstances, firms should consider whether the relationship of the price such consumers would pay is reasonable relative to the benefits they receive."
We believe that generic financial planning enormously creates more value for people than financial intermediation. And the price consumers pay must be reasonable relative to the benefits they receive.
People create wealth with work. Leveraging their plans, vision, talents, entrepreneurial spirit, and discipline. Products manage the wealth that has already been created. It would be best if you already had the wealth to buy a wealth management product.
The primary focus of financial intermediaries is to intermediate between wealthy retail investors and wealth management firms. No financial product creates wealth!
FINANCIAL INTERMEDIARIES DO NOT PROVIDE FINANCIAL PLANS THAT CREATE WEALTH.
According to the UK Office for National Statistics, 95% of UK households have less than £100,000 in Financial Assets (investable assets, not including property assets, business assets, occupational pensions, and physical assets). Typically, UK Financial Intermediaries set an investable asset threshold of £100,000 to ensure profitable practice management. That is how they get paid; 90% take a percentage of the investment as a fee. No investable asset and the intermediary does not know how they will get paid.
The intermediary financial market underserves 95% of UK households that must create wealth before accessing intermediary financial services.
Many wealth management firms believe they can bridge the "advice gap" of disintermediated retail investors by introducing low-cost automated non-advised sales solutions. Solutions that sell products.
Here is the thing ...
The underserved need plans to create wealth, not products that save wealth. They need non-sales advice solutions. They need wealth-creating plans.
GENERIC FINANCIAL PLANNERS PROVIDE PLANS THAT CREATE WEALTH.
This wealth creation plan resembles business plans, including year-by-year profit & loss accounts and balance sheets. They are delivered by identifying productive assets, leveraging entrepreneurial opportunities, creating sustainable livelihoods, and utilising business planning tools and lifetime cashflow forecasting tools.
The cost of delivering financial planning is far lower than the cost of providing financial intermediation.
Globally, financial planning is typically a non-regulated activity. By removing regulation from the process, the planning firm removes over half of the operating costs of running the business.
Margins are improved for planning firms, even after considerable cost savings are passed on to the client.
The potential cost savings diminish when tax is considered. In the UK, financial planning is subject to Value Added Tax (VAT). Whereas financial intermediation is not. Also, financial intermediation fees can be facilitated by deductions from the tax-favoured product.
The big gain in cost savings materialises when we consider what a generic financial planner can do that a financial intermediary cannot. Financial intermediaries must make personalised recommendations. This can only ever be delivered on a one-to-one basis. The financial intermediary exchanges time for money. Time is limited, so the capacity to service clients is limited, and the cost of service delivery is high.
Generic financial planners on the other hand, exchange know-how for money. Generic advice and financial education can be delivered to groups. Fees can be divided by the group size - or for Netflix-style operations, by the number of service subscribers.
Generic financial planning services are available to everyone at a fraction of the cost of traditional financial intermediaries.
The cost of service delivery for generic financial planners is low compared to regulated financial advisers.
In most markets, providing advice on the buying and selling of investments is a regulated activity. The conduct risk lies in the selling, or rather the mis-selling, of investment products. This risk can be mitigated by separating planning and distribution.
Imagine how the conduct risk is mitigated if you remove the particular advice, recommendation, and product sale.
Using the UK as an example, the FCA's Perimeter Guidance sets out where the demarcation line falls. PERG 8.26 states that financial planning is not of itself a regulated activity. It lies on the advice side of the wall!
Financial planning becomes a regulated activity if provided to provide another regulated activity. For example, financial planning is regulated where it is provided with a view to financial intermediation. That is when there is no wall.
Providing life planning, financial planning, generic or general advice on types of investments, financial education, publicly available surveys, studies, or information, lifetime cashflow forecasts, explanation of product features and benefits, and financial accounts generally are not regulated activities. Everything a retail consumer needs to make well-informed decisions can be accessed without recourse to a financial intermediary.
The financial intermediary tells the consumer what to do. Everything is done for you. And that advice is typically to buy more products for the adviser to tap into for fees. Asking the adviser to run your money is seldom the most optimum solution.
For do-it-yourself investors, the provision of studies on low-cost investing, education on diversification and behavioural economics, and comparison surveys on accessible direct-to-consumer platforms, all ensure that investors can make a well-informed decision on buying or selling investments.
When asked for an opinion on buying and selling a particular investment, the generic financial planner highlights in a neutral and balanced way the accessibility, options, features, benefits, and charges available to the investor of direct-to-consumer or advised routes for the investor to make a well-informed decision.
Surveys show that whether advised or not, the most popular outcome is readily understood, well-diversified and low-cost investments already available from a range of providers. Why pay the extra for intermediation in a commoditised market?
Nine times out of ten, the financial plan recommends "work" (what you do for a living), not products. That produces the all-important income-producing asset. We produce asset strategies to convert revenue to passive income, income that continues when your work stops.
Artificial intelligence systems (Robo-advisers) recommend increasing income or reducing expenditure when there are shortfalls in income versus expenditure.
Conflicted remuneration financial intermediaries recommend selling you investment products instead, that they tap into and take a fee. Investment products move money from the fridge to the freezer. Work creates wealth, not a product.
"Show me the incentives, and I will show you the outcome."
That is a Charlie Munger quote about how incentives drive nearly everything.
Generic advice (setting out neutrally the facts relating to investments and services with no spin) is NOT a regulated activity under the European Securities and Markets Authority (ESMA) or Insurance Distribution Directive (IDD), or the Markets in Financial Instruments Directive II (MiFID II).
For the advice to be regulated in the EU, it must involve an element of opinion or judgement on the part of the adviser. Regulated advice involves recommending a course of action or judging the merits of exercising a right, such as buying or selling. Generally speaking, giving someone information and nothing more is not regulated. Giving facts about the performance or the price of investments does not constitute regulated advice if the investor is left to exercise their own opinion on the action to take.
For example, in Spain, only advisers authorised by the Comision Nacional del Mercado de Valores, or CNMV for short (National Securities Market Commission) or Bank of Spain, can advise on investments, except passported permissioned advisers.
Generic financial planners do not under any circumstances solicit money from clients or make a judgement on the merits of exercising a right, such as to buy or sell or give advice on particular investments, nor do they give personal recommendations.