The recent move by HSBC to cut jobs in its wealth management arm is further evidence of how the Retail Distribution Review and other pressures are squeezing advisory services to the mass UK market, industry figures say.

The RDR was brought in to clean up the financial service sector and to give customers greater protection and confidence in the advice they receive, following scandals such as the mis-selling of payment protection insurance, which has now become one of the most costly episodes of its kind in history.

Although the new regulations have been welcomed by many in the financial services sector for promoting trust and transparency, there has also been strong criticism due to their unintended consequences. For example, some banks have responded to the reforms by only offering services to high net worth individuals or disposing of their advice arms as they seek a more economically viable model, which has led to some people being excluded from financial advice altogether.

In terms of the impact of the RDR on employment in the financial services industry, advisors working in the banking sector have been hit hardest with a fall in numbers of 44 per cent, down from an estimated 8,658 at the end of 2011 to 4,809 at the end of 2012, according to figures released in March by the-then Financial Services Authority, the predecessor to the new Financial Conduct Authority.

Several banks have already partially or fully withdrawn from offering financial advice to the mass market in the last year, pressured by the higher costs of providing bespoke advice.

As part of the new regime, banks no longer earn commission set by the product provider, but are instead paid an advisor charge agreed with the client in advance. Banks also have to retrain staff to meet the enhanced qualification standards set by the RDR, which also makes it unattractive for them to continue offering advice.

Last year, Lloyds said it will stop offering investment advice to people with less than £100,000, after research showed that customers were unwilling to pay fees for advice in a post-RDR environment. However, the bank – partly owned by the taxpayer - will continue to offer a non-advised service through the Bank of Scotland, Lloyds TSB and Halifax branches.  

Lloyds is charging an advice fee of 2.5 per cent on the first £300,000 invested. This will drop to 1.5 per cent between £300,000 and £1 million, falling to 0.75 per cent on amounts between £1 million and £2 million. On amounts above £2 million there is no advice fee charge. Platform charges vary between 0.1 per cent to 0.6 per cent, depending on the amount invested.

"We welcome the drive to higher professional and educational standards required for financial advisors selling investment products across the financial services industry. In light of the RDR, we have made changes to the way customers are charged for advice through our wealth service. This includes a separate fee for advice payable when a client agrees to go ahead with our investment recommendations and the introduction of a tiered advice charging structure, where the fee payable is dependent on the amount invested," said a spokesperson for Lloyds.

"A tiered fee-based structure means clients will benefit from lower percentage amounts at higher levels of invested assets. The model also takes into account previous advised investments when calculating the level and percentage fee," the spokesperson added.

HSBC’s move

As part of the proposed changes at HSBC, existing wealth advisors will come under the bank's retail banking business. The roles of commercial advisors will also be scrapped, along with 942 relationship managers who do not give financial advice. HSBC said this reorganisation was in response to the RDR and the necessity of having the right number of correctly qualified advisors in the bank.

HSBC customers will now need at least £50,000 in total assets in order to receive advice from the bank. HSBC clients pay an upfront fee of £950 on assets up to £75,000 and then 1.3 per cent on assets up to £150,000, with a maximum fee of £1,500. For assets between £150,001 and £500,000, the charge falls to 1.3 per cent with a maximum charge of £1,500. This drops to 0.8 per cent for assets up to £1 million with a maximum charge of £4,000 and 0.65 per cent for assets between £1 million and £3 million.

"The changes we are proposing are in response to the RDR and having the right number of correctly qualified advisors in the bank. We have made some truly significant changes, but we have not changed the products themselves. You cannot subsidise the cost of advice and as we are looking to provide high quality advice. That is a challenge, so we have had to let advisors go," said a spokesperson for HSBC.

"At HSBC, we have embraced this positive new change and believe it offers a number of benefits for our customers. We are still committed to giving advice and the changes reaffirm that commitment. Previously, relationship managers were not regulated, but with the reforms, there will now be an increase in the number of qualified advisors from 550 to around 850," the spokesperson added.

Barclays pulled out of mass market retail advice in 2011 as it found it was no longer commercially viable, but has continued to offer service to high net worth clients through Barclays Wealth.

“Ultimately, the RDR has raised the bar and is challenging the industry to improve the quality of service, advice and execution for clients. We search the market widely to select the very best managers on behalf of our clients. In order to do that and to focus on the most relevant investment solutions and services, we will be providing advice from an approved list, following extensive research and due diligence," said Stuart Cummins, managing director of Barclays Wealth and Investment Management.

"For us, the main focus has been the further development of our advisory services, continued investment in the qualifications and technical depth of our people and using this as an opportunity to deliver an improved service to our clients,” he added.

Royal Bank of Scotland has considerably scaled back its mass market offering and last June cut 618 advisor jobs. Unlike Lloyds, Barclays and HSBC, there is not a minimum investment amount for clients banking with RBS.

RBS will charge a £500 fee to set up a financial plan and then charge 1.25 per cent for assets up to £500,000, falling to one per cent for assets above £500,000 and then 0.75 per cent for assets above £1 million. Platform charges will start at 0.175 per cent for assets less than £100,000, dropping to 0.11 per cent for assets over £1 million.

Customers have the option of signing up for ongoing advice which is charged at 0.5 per cent and is capped at £2000 a year. Alternatively, clients can pay £500 if they have opted for a new plan and have not paid for ongoing advice.

“The implementation of the RDR has significantly changed our financial advice offer for new and existing customers. We remain available for customers to access advice in branches where we have professionally qualified and professionally accredited advisors. Our service offer is to build a financial plan for our customers that cover their investment, retirement and protection needs,” said a spokesperson for RBS.

“Our financial planning service has been designed as a standalone product and therefore not financially connected to any product solutions we may recommend to a customer. It is aimed at our private banking customers of RBS and NatWest, but anyone can access the service if they are prepared to pay our planning fee. This group of customers are the part of our customer base we think would most benefit from the service. We have limits in place to ensure our advice is good value and would highlight to customers if we did not believe paying our fee was in their best interests,” the spokesperson added.

At the end of last December, Santander said it was suspending its investment advice service as its advisors were not fully trained to meet the RDR standards. In March, after completing a strategic review, the bank announced it would no longer offer investment advice, axing 724 jobs.

The bank said it would keep 150 advisors on in its new financial planning division to deal with existing customers. Santander is also facing an investigation by the Financial Service Authority after a “mystery shopper” exercise discovered failings in its investment advice earlier this year.

“Santander UK will continue to provide advice to existing customers with maturing investments. We will also continue to explore how and to whom we can provide face-to-face advice, within the new regulatory framework, in a way that benefits and protects customers, our colleagues and indeed Santander itself,” the firm said in a statement released in March.

Advice gap

Despite the benefits of higher standards and clearer costs, the RDR has been widely criticised as it could lead to an "advice gap".

A report published in January by Cass Consulting and Fidelity Worldwide Investment suggested that as many as 43 million Britons, who have an investible wealth of £440 billion, could fall into the advice gap as a result of the RDR.

The British Bankers Association, the trade association for the UK banking and financial services sector, said it was concerned about the impact of the RDR on consumers as banks were no longer supplying advice to the mass market.

"We believe that the RDR is good for customers as the changes have made the industry more transparent and will increase professional standards. One of the knock on effects is that banks are going higher up the wealth curve and people are also opting up. However, there has been a contraction in advice and fewer people are getting the help that they need now that banks are mainly catering to wealthy investors," a spokesperson for the BBA said.

"The industry needs to reflect on itself and look at how more people can get financial advice. In the future, we will be looking at how the financial services industry will be able to reduce costs to remove fees so that more people have access to professional advice," the spokesperson added.

Research by Deloitte in December 2012 estimates that 5.5 million people could stop using financial advisors as a result of the advice gap. Deloitte found that customers most likely to exit the advisor market are from the mass market (2.4 million), mass affluent (2.5 million) and affluent (600,000) segments. Of these customers, up to 3.4 million use bank advisors.

As banks withdraw their services following the implementation of the RDR and become more selective through their pursuit of high net worth individuals, a number of IFA firms have benefited by filling the void in the market created by the advice gap. One firm looking to take advantage of the new regulatory landscape is financial advisory company Lighthouse Group.

"Lighthouse Group is gaining a significant foothold in the ever-evolving advisory market and increasing its customer base as a result of banks and building societies, where middle Britain would have gone to seek advice, withdrawing their advisory services following the implementation of the RDR," said chief executive Malcolm Streatfield.

“We are operating in a different marketplace to the one we worked in as recently as a year ago. Middle Britain is concerned about the future of its finances, with many in this group having significant savings. They want to make sure their hard-earned cash is working hard for them but they need expert and well-informed financial advice which has been and is being withdrawn from institutions to which they would by instinct turn to,” he added.

With so many people unwilling to pay, or unable to afford financial advice from banks, the advice gap post-RDR clearly presents a major opportunity for product  providers.

However, according to Deloitte, it may be alternative advice providers that emerge as winners in the advice market. Direct-to-customer channels look set to grow significantly in the next five years as customers go online to seek the financial guidance that they need.

Deloitte's research found that 57 per cent of those who have recently used a bank advisor would be likely to search online providers' websites for products if charged directly for advice. Similarly, a high proportion of IFA customers (52 per cent) would also do the same.