The Financial Conduct Authority (FCA) has said "competition does not appear to be operating effectively in the interests of consumers" in the advice market which is having an impact on the amount of people who seek advice.
The UK watchdog has published a new evaluation of the impact of the Retail Distribution Review (RDR) and the Financial Advice Market Review (FAMR). Both the RDR and FAMR sought to improve the distribution of retail financial services products, and the FCA committed to evaluate their impact, to test whether they delivered their desired outcomes.
In its evaluation of the market over the past two years the FCA found a "significant clustering" of adviser charges. The watchdog admitted it can reflect a healthy market where competition drives advice services to specific price or quality points.
It is clear that the UK remains behind markets like the US where the use of technology and AI is more advanced
However, the FCA said its analysis indicated that ongoing services with a 1% annual adviser charge did not have noticeably different features to those charging 0.5% annually.
This was also the case for one-off advice offerings where services charging 3% did not have appear noticeably different to those charging 2% or less.
In addition, the research also found that the average adviser charges were 2.4% of the amount invested for the initial advice and 0.8% per year for ongoing advice.
The regulator said that advice firms appear to "face little competitive pressure to innovate and offer new, more affordable services, or to try to attract less wealthy consumers."
According to the FCA, many consumers are still holding money in cash that could be invested to provide potentially higher returns, but they have not sought or received the help with their finances that would help them to make better investment decisions.
Also detailed within the review, estimated assets under automated advice services increased from £400m in 2016, to £3.2bn in 2019.
The FCA's latest evaluation found that approximately 8% (4.1m) of all UK adults have received financial advice, an increase from 6% (3.1m) in 2017.
Sarah Waring, client and proposition director at Quilter, said that although the increase in the number of people receiving advice was welcome, "growth in financial advice has been moving at a glacial pace".
She said: "Just 8% of all UK adults have received financial advice, while an increase from the 6% in 2017, we know the population that would benefit from financial advice is much wider.
"It has been some time since the regulator's interventions through Retail Distribution Review and Financial Advice Market Review and there is palpable frustration from both the sector and the regulator that more improvements haven't been made.
"In this report the FCA identifies two developments that would make a substantial difference to the market - simpler forms of streamlined advice and more personalised guidance services. This makes sense as we are increasingly hearing from advisers that are engaging with intergenerational planning, that younger relatives often need transactional advice rather than holistic advice given where they are in their financial journey. Reformed regulatory requirements and technology can go a long way to help fill this gap.
"It is clear that the UK remains behind markets like the US where the use of technology and AI is more advanced and they are moving away from the false dichotomy of face-to-face advice versus robo-advice. A hybrid form of advice is becoming increasingly common, which is something the UK will eventually embrace.
"That being said technology is clearly not the silver bullet. Although there is more awareness of automated advice services, rising from 10% of adults in 2017 to 19% in 2020, people remain wary. The explosion of financial scams during the Covid-19 period has made people more wary than ever. The FCA research showed that respondents were concerned that unknown brands might not survive in the market, or that they would have less robust security than the larger established firms. Technology is a great democratic power to allow services to reach a wider audience but we need to be cognisant that when it comes to their money people are very cautious.
The FCA also found the market was dominated by the bigger advice players, despite the sector consisting of a high number of smaller firms.
The review found 89% of firms had five or fewer advisers and, although forming less than 1%by number of the firms in the market, firms with 50 or more advisers employed approximately 52% of all advisers in the market.
The paper also revealed that the number of advisers has risen from 35,000 in 2012 to 36,400 in 2019, an increase of 4%.