Since the RDR, the advice profession has been on a journey to discover how to service customers caught in the so-called advice gap. The FCA recently raised this issue again as it prepares to assess the impact of the RDR and the subsequent Financial Advice Market Review. But issues remain over whether low-cost advice services or guidance can actually make a profit. Do any current models hold the key?
The digital divide
Many advisers argue that the RDR’s decision to ban commissions and introduce higher qualification requirements, combined with subsequent regulation such as Mifid II, has driven the cost of advice up.
In a 2016 survey conducted on behalf of the Association of Professional Financial Advisers, 69 per cent of advisers said they had turned away potential clients over the previous 12 months, with half of planners doing so because they deemed them not profitable.
However, others are keen to carve a niche for those lower down the value chain. Simplified Money director Lesley James says she has had to turn away some clients in the past year, but simply because the firm only targets clients with pots under £300,000.
Buckinghamshire-based Simplified Money runs a fixed-fee model, with an offering consisting of three plans: a guidance plan for £349, full fat financial advice for £749 for people with up to £120,000, and £1,149 for a plan for people with greater than £120,000 in assets.
James explains: “We worked out how much time it takes to do what most clients want from us, in a way that would be profitable for us. Then we were tweaking every now and then.”
She says that to keep the fees down, the two-man band uses “as much technology as possible to do the heavy lifting”.
James says this part of their proposition is currently under further development.
She adds: “In few years’ time, it will effectively be down to artificial intelligence. We are setting up the system and teaching it what we are doing and how we are talking to people.
“Effectively, I will be the doctor in front of the diagnosis machine, and then I just need to decide whether the diagnosis is right or wrong, and amend it and tweak it accordingly.
“And then I can spend all my time in front of the client, helping them be reassured, answering their questions.
“The system will be a little robot, effectively my support, by my hand.”
James emphasises that the system itself will not be making decisions, but it will – eventually – be making predictions, and sending her information she had previously had to request without her having to ask for it.
Using technology to support planners to make them more efficient is one of the ways the market is trying to meet the challenge of making advice more accessible post-RDR.
Apart from planners, other industry players have emerged to try to fill the gap in the market.
For new entrants, acquiring new clients is proving difficult. According to estimates from consultancy Altus, client acquisition cost for robo-advisers runs to around £300 per client.
Robo-advice services continue to report losses, however.
Is advice or guidance the answer?
FCA research from last August showed half of the people who did not take regulated advice in the previous year, and who may have needed it (these are, according to the FCA, defined as people with at least £10,000 in savings and/or investments), did not use the services of an adviser because they did not feel they needed them at that time. Moreover, a further 37 per cent said they felt confident when deciding what to do with their money, a 9 per cent increase from a year before.
Recent research by The Lang Cat, commissioned by OpenMoney, showed reluctance to receive guidance on money matters, even free of charge.
When the survey asked respondents whether they thought they would benefit from free access to financial advice – either face-to-face or online – more people actually disagreed than agreed (49 per cent compared with 39 per cent).
When researchers asked whether the clients, if offered free guidance on how best to manage their money, would take up that offer, a slightly higher percentage (43 per cent) stated that they would, while 39 per cent would not.
With consumers generally still unwilling to take guidance for free, entrepreneurs may find it particularly difficult to make a profit from providing it.
However, while the survey showed low interest in guidance on money management, it identified situations where people would be willing to pay for advice, such as starting a business, making an investment, buying a house or setting up a pension. Industry players might want to focus on these.
Digital services can be the key to unlocking advice for the masses
I remain a passionate believer that the power of technology will help the brightest minds to re-imagine financial services. We have all personally experienced it across pretty much every industry we touch – travel, retail shopping, entertainment, communications – and the pleasure we get from using a smart, frictionless app on our phone that meets a real and immediate need.
Yet when we turn to financial services, to digital (or ‘robo’) advice, I’d argue that to date we’ve done no more than dip our toe in the water.
What many of the digital propositions have done – pretty well in some cases – is to digitally re-engineer the existing investment advice process to be a bit quicker, a bit cheaper, than the existing model. In other words, (if they can shout loud enough amongst all the other similar propositions) they may appeal to some existing advised or self-directed investors.
But have they truly delivered on their promise of making financial services more compelling, more accessible to the masses?
What consumer pain-points are they really addressing? Are they helping the millions of UK consumers who have debt problems? Or those who prefer to save in cash, whether we like it or not? Or what about those who don’t have enough to spend, but might have if they had better control and management over their personal finances? Or those retiring, who need to know how to tax-optimise their income in retirement from the various pension pots, investments and property they own? Which of the digital providers are addressing these needs, simply, impartially, and at low cost?
Trying to digitally replace an investment or financial adviser is not going to work; digital services need to offer something different, something that uses the power and breadth of tech; biometrics, open APIs, open standards, data (including open banking) – it all exists today. 5G – coming soon – will be a game-changer.
Yet many businesses just choose to create a version of what everyone else is doing, with a slightly different user interface experience.
Where’s the real business model innovation, the real disruption, since Nutmeg first came to market seven years ago? Where are the maverick thinkers with the creativity to really grab hold of the opportunity, to see the world through the customer’s eyes? It’s hard, but that’s where the prize is.
And please, let’s have no more of the lazy “my fees are lower than your fees”, or “my performance is better than yours”.
If you do, you’ll get exactly the results you deserve.
Simon Bussy is director for wealth at Altus
The future for robo-advisers
Other robo-advisers, however, in the face of losses, are still searching for more funding. Nutmeg calls itself the biggest digital wealth manager in Europe, but made £12.4m loses for 2017, up from £9.4m from the year before.
Robo-advisers may be a tempting target for fund houses, as these could represent a distribution channel for them. The market has already seen such marriages: Nutmeg has backing from Schroders, and more recently announced a £45m capital injection from Goldman Sachs.
It is not clear, however, who will bring advice to the masses, but so far it seems they will not be able to do that alone.