In recent weeks, I have become involved in a number of passionate debates over the future evolution of advice. Most of these have been as a result of presentations I have given at The Protection Review and True Potential’s recent conference. At each event, I have been presenting a considered view on the impact of technology over the next five years.
While it is not possible to explore the full depth of the issues covered by a 30-minute presentation, I would like to outline a few of the reasons why I believe the financial advisers now have an unparalleled opportunity to extend their reach to many millions more consumers.
IFAs are currently servicing 600,000 to 1,000,000 consumers, at best, with the vast majority of whom are more affluent individuals. By comparison, nearly 7,000,000 British citizens earn approximately £30,000 or more each year.
These figures suggests to me that the current advice model is failing to reach most of the people who really need financial advice. However, it also shows that there is an enormous opportunity for anyone who is able to deliver affordable advice to those not currently supported by our industry.
Clearly, the-RDR is going to exacerbate the advice gap. To meet this need, a new generation of financial advice services is emerging around the world. In the vast majority of cases, these services involve providing consumers with advice using an online system that captures and analyses the customers circumstances without the need for human interaction at the adviser end.
In essence, what has happened is the adviser firm has built an algorithm-based advice system which takes the consumer through an online
factfind process, enables them to identify their goals and the appropriate risk attitude for each and then identifies suitable investments, usually using model portfolios, to address the consumer needs.
The services I am describing are not science fiction; fully authorised advice firms are operating in the US and the UK along these lines today. As a result, they are able to deliver a form of financial advice at considerably lower costs than those necessitated by the traditional human process.
Not surprisingly, many IFAs are quick to question the viability of such an approach, however, the reality is that such firms are now emerging. By harnessing science and technology, they are able to deliver consistent auditable advice processes demonstrably providing good customer outcomes at a cost that makes advice affordable.
Over the last 20 years, it is hard to think of an industry where technology has not radically reorganised the way people work. Is it really realistic to expect that financial advice will be immune from this?
It is also increasingly clear that Generations X and Y acquire information and services in very different ways to previous generations. Increasingly, consumers will not buy services that they do not understand and the “trust me, I’ll do it for you” model of the past is increasingly unacceptable to 21st century consumers.
Some advisers have suggested to me that Generation X and Y are irrelevant as they don’t have any money currently. If a firm takes this approach, what does it say for the longevity of that business?
As advisers themselves seek to exit, how much is a business worth if it is made up almost entirely of ageing clients?
I was recently discussing this with one industry luminary who pointed out that it is hard to see how a three times revenue multiplier might be justified for a business where the clients are mainly in their 70s. While they may have significant longevity, based on recent research at least one-third will lose the capacity to manage their financial affairs. At this point, it will become necessary for the adviser to deal with the next generation who evidence suggests will increasingly require a different level of understanding of the advice they are given.
One of the great strengths of the IFA community has been it continuing ability to evolve in difficult circumstances. I see the emergence of algorithm-based advice not as an alternative to financial advice, but as a mechanism to hugely extend its reach.
In practical terms, over the next few years, I anticipate we will see a mix of the ABA approach blended with human support to help advisers keep the cost of advice down to a level that more customers can afford.
Finding ways to embrace what these new technologies can bring may represent a significant cultural change but at the same time could deliver levels of service and pricing that make advice far more economic. I see a very bright future for financial advice but am increasingly coming across clear evidence that the way in which it will be delivered will radically change by the end of this decade.
I am in no doubt that within five years, the advice community will be giving more advice to more people at lower cost and the advisers who recognise this opportunity and rise to it can expect to build very valuable sustainable long-term businesses for the future.
Ian McKenna is director of Finance & Technology Research Centre
For those who wish to understand in more detail how emerging technology can evolve the advice process I have written a blog looking at those issues which can be found here