At the end of my last column I promised to return to a number of issues about the potential for developing digital advice.
This subject is generating passionate discussions, with many arguments being put forward for why more digital advice is not viable. I have not, however, seen anything that I believe cannot be addressed in time.
To me it is a matter of when, not if, digital advice solutions become a wider part of the market. I would suggest a more important issue is what sector of the market digital solutions are best placed to support.
I am convinced that now, and for the next few years, the optimum solution for those who can afford it is a mixture of leading-edge technology combined with advice.
I passionately believe in the advice market. But advice is changing and those firms that adapt with it will gain the most.
One of the most frequent arguments for why digital advice cannot be developed is that it cannot meet the requirements of the Financial Ombudsman Service. Keeping the FOS happy will certainly be a challenge, but you could say the same of the whole advice sector. Isn’t this an area where the traditional and digital advice sectors have
a common cause?
Present market conditions are excellent for millionaires. Over 20 years, financial regulation has significantly reduced the cost of advice to the wealthy, who get better and better value. The cost has been that vast numbers of citizens are excluded from the advice process.
While the FCA is a significant evolution from the FSA, we have not seen a similar progression at the ombudsman. Its approach is still to look for the perfect solution in every situation and to expect services supplied to be not so much advice but a guarantee that addresses every possible scenario and benefits from 20/20 hindsight.
In the case of smaller savers, the fact that anyone giving advice is for all practical purposes guaranteeing the outcome means that the cost of guidance becomes uneconomic.
I am convinced that the FOS has unwittingly become the biggest constraint on most UK citizens being able to get the advice they need. Surely the need to persuade government that there is a call for a more practical and pragmatic role for the ombudsman should unite the advice markets – both the traditional and the emerging digital.
Delivering guidance digitally has enormous potential to make such services affordable. Yes, we should be clear about what advice is and what guidance is, but this should not constrain the delivery of such capability.
This represents an enormous opportunity for the UK economy. According to Alex McCracken of the London office of Silicon Valley Bank, $11bn (£6.5bn) was invested in financial technology globally in 2012.
Of this, $3bn was invested in the UK, representing a 30 per cent share of global investment.
By comparison the US, with five times the population of the UK, achieved a 61 per cent global share. Germany achieved only a 1 per cent share and the rest of the EU a mere 3 per cent. The remainder of the world managed only 4 per cent. The UK is the global leader per head of population in FinTech.
It is fair to say comparatively little of the new FinTech development in the UK is focused on automating advice.
In comparison, there are many services operating in the US that enable consumers to set goals, identify attitude to risk and build an investment portfolio that is optimised for tax purposes. Portfolios are monitored day to day and recommendations for switches generated daily, both for underlying investments and product wrappers.
These businesses are being established mostly by groups of entrepreneurs – usually involving a mix of professional financial advisers, maths PhDs and advanced programmers – rather than large financial institutions.
When I meet the people behind these businesses they are invariably committed to making financial advice and guidance a utility that everyone can afford rather than a luxury for the rich.
If there is one area where in my experience these systems would not meet UK regulatory requirements it is in assessing suitability – that is, addressing not just risk profiling but also the risk required to achieve an investment and the level of risk a user can tolerate in aiming for a given objective. If the UK can address these requirements digitally, and I believe we can, we can give a global lead both in regulation and digital advice.
In the UK, the RDR has left many millions of consumers unable to afford financial advice and whom most advisers readily admit they do not see as their target market. If we are going to address the advice gap – the millions of consumers that financial advisers either do not wish to, or cannot economically serve – I believe reform of the FOS is essential.
To continue to be fit for purpose it must cease to be a constriction on the availability of guidance and advice. The principal beneficiaries of such reform would be consumers who cannot afford the advice and guidance they need.
The UK probably has the best-regulated financial advice market in the world. We could – and should – make the UK the global leader in digital financial advice but to do so we need a home market where such services can thrive. This can bring enormous benefits to the UK economy and to those who are disenfranchised from financial guidance.
Ian McKenna is director of the Finance & Technology Research Centre