Survey reveals opportunities and challenges facing retailers looking to break into retail investment advice market

After polling more than 2000 adults in August last year, market research consultancy Rostrum Research said that just 16% of respondents said that they would "feel comfortable paying for financial advice from a retailer". Of that number, 91% said that they would only pay up to £25-per-hour for the advice.

Rostrum Research said its survey was aimed at assessing consumer attitudes towards the financial services market. The results showed that consumers are more willing to buy financial products, such as current and savings accounts or insurance, from retailers such as Tesco, John Lewis and Marks and Spencer, than they are to pay for financial advice from those or other firms in the retail sector.

"By combing well-known brands with an established infrastructure that has been optimised for sales, a small handful of these retail businesses are likely to lead the charge into financial services," a report (11-page / 663KB PDF) published by Rostrum Research into its findings said.

"However, it remains to be seen whether these new players will be able to generate substantial revenue from their foray into this market, since many consumers may be reluctant to combine their private financial matters with their weekly trip to the shops, and most seem to have little appetite for buying more complex products, which would require advised sales (especially if it means paying upfront for financial advice post-RDR)," it said. "At the same time, the barriers to entry are likely to be high for new players in this market, as retailers will need to plan for significant capital requirements, new risk management strategies, and strict FSA regulations."

According to the report, independent financial advisers (IFAs) typically charge an hourly rate of between £50-150. New rules now in place prevent advisers from receiving commission from product providers when they recommend a particular product to invest in to their clients, and instead require that advisers are only paid for their services from clients. These rules will "likely" see the cost of advice increase, Rostrum Research said.

New rules prohibiting the payment of commission to advisers came into force on 31 December 2012 after the Financial Services Authority (FSA) decided to take action to improve transparency over the charges consumers face in the retail investment market.

Under the regulator's Retail Distribution Review (RDR) rules advisers can only receive payment for the personal recommendations they make about investments from clients. The FSA introduced the rules after expressing concern about the way advisers are often paid commission from product providers for recommending their products to clients. Commission payments had risked advisers not always providing personalised recommendations that best suited clients, the FSA had said.

The RDR rules require advisers to inform clients of whether they are providing advice on an 'independent' or 'restricted' basis. This declaration must be provided to clients in writing in good time before they provide advice services.

Generally, IFAs are required to consider all available products and providers in the market before making a personal unbiased and unrestricted recommendation to clients on what to invest in. Restricted advisers can legitimately offer advice based on a smaller list of products or providers, even if taken from a single source, providing they are up front about this with clients.

However, both IFA and restricted advisers are bound by the adviser charging rules other than in cases where restricted advisers can be said to be offering "basic advice", a simplified form of financial advice generally using pre-scripted questions to determine whether a financial product will suitable for a customer. In those circumstances restricted advisers can legitimately obtain fees, commission or other benefits from product providers or others.

Under the RDR financial advisers generally also have to pass new examinations to ensure that they are suitably qualified in order to provide advice on retail investment products to consumers.

Rostrum Research said that its findings had shown that there were both challenges and opportunities for retailers that want to get into the retail investment advice market.

"Not only are most consumers unwilling to pay for financial advice in the majority of cases, but even those who would consider paying a fee for this service have strict limits when it comes to how much they are willing to pay," it said in its report. "The vast majority of respondents – and especially those at the higher end of the income scale – have also expressed the need for private areas and designated meeting rooms when discussing financial matters, which could necessitate store redesigns and other operational changes."

"Despite these challenges, the potential for this market represents an enormous opportunity for retailers. The businesses that are able to study and understand customer sentiment in this area, and then use this information to offer a superior service that reflects the wants, needs and concerns of modern consumers, will be the companies that dominate this market going forward," Rostrum Research said.