Financial Planning: Filling the Gap Left by Financial Advice

The financial services landscape in the UK has seen significant shifts over the last few decades, but one critical mistake has caused lasting damage: the failure to recognise the difference between financial planning and financial advice. It’s a mistake that has led to a significant “planning gap” – a void in the services offered to the UK public. At the heart of this issue is the fact that senior decision-makers, many of whom were not qualified to make these calls, misunderstood the vital role of financial planning.

Financial advice and financial planning may sound similar, but they’re worlds apart in practice. Financial advice is about recommending specific financial products, such as investments or insurance policies. Financial planning, on the other hand, is far more holistic. It’s about looking at the bigger picture, taking into account an individual’s goals, aspirations, and overall financial wellbeing. It is a strategy, a blueprint for long-term financial success.

The devastating consequence of not understanding this distinction? A huge part of the UK population is now underserved by the financial services industry. While financial advisers focus on products for those with substantial wealth, the majority—95%—are left behind, without a solid plan for their financial future.

The Exodus of Financial Advisers

At the turn of the century, insurance companies exited the financial advice market. The banks followed in 2012, during the UK Retail Distribution Review. Finance Directors deemed financial advice a “zero-sum game” – and they were right, in part. However, this decision was based on a lack of understanding of what true financial planning entails. The result was catastrophic: hundreds of thousands of financial planners lost their jobs, leaving only a fraction remaining in the industry. A planner gap, not an advice gap, emerged, and millions were left without professional guidance.

You see, it’s not just about the products being sold. Financial planning creates trust and leads to more long-term wealth under management. It encourages people to save, invest, and plan for the future. Without this, the financial wellbeing of UK citizens has suffered dramatically.

Mismanagement at the Top

During my time as Head of Investments at the banks, I witnessed first-hand the lack of understanding from senior management. Decisions that should have been made by qualified financial experts were instead made by those without the necessary knowledge. Take one of my bosses, for example – previously the marketing director at Pampers, a well-known nappy brand. When critical decisions about investment products were being made, they did not consult professionals like myself, who held the highest industry qualifications. The result? Short-sighted decisions that put the financial wellbeing of millions at risk.

Inequality Continues to Grow

The impact of these poor decisions is still being felt today. Income inequality in the UK has risen steadily since the 1980s, and wealth inequality is even more pronounced. While the wealthiest continue to grow richer, the bottom half of the population struggles to accumulate assets. Housing market trends and rising property values have disproportionately benefited older generations, leaving young people at a disadvantage. It’s clear: proper financial planning could have helped bridge this divide.

But all is not lost. With a better understanding of the distinction between planning and advice, there is an opportunity to turn things around.

The Solution: Proper Financial Planning

What we need now is a return to genuine financial planning. The evidence is clear, as demonstrated in the Vanguard Adviser Alpha study, which suggests that advisers can add as much as 3% in annual returns to a client’s portfolio—not by choosing superior investments, but through comprehensive planning and behavioural coaching.

Here’s how planners can add value:

• Behavioural Coaching (1.5%): Helping clients avoid emotional decisions, such as panic-selling during market downturns, has the most significant impact on long-term returns.
• Asset Allocation (0 to 1%): Matching a client’s investments to their financial goals and risk tolerance ensures sustainable growth.
• Cost-effective Implementation (up to 0.40%): Advisers who focus on reducing costs, such as using low-cost funds, can save clients money that compounds over time.
• Rebalancing (up to 0.26%): Periodically adjusting the portfolio ensures that risk levels remain appropriate for the client’s evolving goals.
• Spending Strategy (0 to 1.10%): In retirement, strategic withdrawal of funds can significantly reduce tax liabilities, helping assets last longer.
• Tax-efficient Investing (up to 0.75%): Placing investments in the right accounts can lower the tax burden on a client’s portfolio.

Each of these components is a part of financial planning—not advice. By offering holistic financial plans that focus on long-term goals and human capital, financial planners can guide their clients to a more secure financial future.

The Financial Conduct Authority (FCA) plays a crucial role in overseeing the conduct of financial advisers in the UK, but it does not directly regulate financial planners. According to PERG 8.26.2, the legal liability for bad advice rests with advisers who sell financial products, which is where many of the UK’s mis-selling scandals have occurred. Over the years, cases like the British Steel Pension Scheme (see M-POWER: The Money Empowerment Movement for the full list of scandals under the FCA's watch) have shown that despite the FCA’s presence, poor practices in the financial advice sector persist. This has led many Finance Directors to view financial advice as a zero-sum game—one where legal liabilities outweigh the benefits.

The solution for creating true integrity and trust in the market is simple: a clear separation between financial planning and product sales. Financial planners should not be compensated through commissions or sales of financial products. This would eliminate the conflicts of interest that lead to mis-selling and poor conduct. By ensuring that planners are only paid for their advice, and not for pushing products, the industry could shift towards genuine client-first planning, fostering trust and delivering real long-term value for consumers.

The Future of Financial Planning

As the financial advice industry continues to focus on high-net-worth clients to such an extent that they might no longer be classed as retail investors, there’s a growing opportunity for financial planners to step into the “retail planning gap.” With the right approach, planners can offer affordable, project-based or hourly fee services that appeal to the majority of the population.

Financial planning is about more than just selling products. It’s about providing the tools and guidance necessary for individuals to achieve financial security and peace of mind. And that’s the future we must aim for—one where financial planning is available to everyone, not just the wealthy few.

For a deeper understanding of the themes discussed, you can explore the additional appendices. Click here for the full article.

Appendix A highlights the Vanguard Adviser Alpha study, detailing how advisers add value beyond just selecting investments.

Appendix B outlines the qualifications required for financial planners, showing how these certifications distinguish them from traditional advisers.

Appendix C looks into the impact of wealth inequality in the UK and how financial planning can help reduce the gap.

Appendix D explains how financial planning, combined with human capital development strategies, can benefit retirees by creating sustainable income streams and opportunities for growth.

Finally, Appendix E shares my own career journey, demonstrating how my experience has positioned me to witness the evolution of the financial planning industry first-hand.

Each of these sections offers valuable insights, helping you understand the full potential of effective financial planning.