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Ian McKenna: The US firms giving advice for just £12 a month

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Two weeks ago, I outlined what I believe is both the biggest challenge and greatest opportunity for the UK personal finance industry.

In brief, this is how digital communications can be used to make the UK a savings nation again and help the entire population to plan their finances more effectively, rather than the small percentage currently supported by the adviser community.

This week, I want to look at three examples of US companies which are addressing this challenge. They are a mere sample from a far larger community of such firms, many set up by registered investment advisers, the US equivalent of IFAs. 

F&TRC is monitoring over 30 organisations around the world which are developing services to meet these needs. Almost invariably, each is taking a subtly different approach from the others. But major innovation is taking place to empower consumers to take control of their financial future.

The three US examples all exhibited at FinovateFall 2013 – the most recent of the series of worldwide conferences that focus on financial innovation. 

This year’s autumn conference took place in New York and featured an unprecedented number of digital wealth management services. 

A more extensive summary of the organisations and technologies relevant to Money Marketing readers can be found on my blog at http://www.ftrc.co/blog/ian-mckenna/. This includes more detailed analysis of the three firms covered here, some of which operate in new, very different ways to deliver financial advice.

Future Advisor is a scalable automatic portfolio management solution. The service initially captures the age, retirement date and risk profile of a customer before allowing them, through account aggregation, to automatically import details of all their retirement and investment accounts.

From this, the service generates an action plan which reviews the portfolio for performance (back-tested), diversification and fee and tax-efficiency. This then provides recommendations – account by account, holding by holding – to improve the customer’s portfolio. 

The output report identifies, among other things, improvements to the asset allocation and opportunities to achieve reductions in fees. The user can see the reason behind each recommendation.

For customers who take the premium option, the system will invest new cash, monitor and rebalance accounts as well as harvest tax losses with their existing accounts. 

Users can identify which plans they wish to switch to Future Advisor and the system will generate all the necessary documentation. This is consolidated to either Future Advisor’s custodian or the client’s broker dealer (platform, in UK parlance) if they already have one. 

The service is offered to investors for a household fee of $19 (£12) a month, 50 per cent of which is shared with introducing financial institutions with which they partner.

LearnVest is a purely financial planning proposition; it does not sell any product. It provides a seven-step action programme based around very powerful online financial planning software which the firm has built. Clients pay an initial fee of either $299 or $399 plus a monthly fee of $19 although there is a budget option starting at just $89.

In addition to the online financial plan, users have unlimited access to certified financial planners by telephone or email.

The company, founded by chief executive Alexa von Tobel in 2007, has raised $41m in private equity funding from a range of investors, including American Express, with which it is due to roll out further partnerships later in the year. 

Following its most recent fundraising, the company has set up an advice hub in Phoenix although it has advisers located from Hawaii to New York.

At FinovateFall, it launched an iPad version of its service while also announcing a workplace version, LearnVest at Work. The latter, should a UK service emerge, would be ideal to complement auto-enrolment and address financial wellness, which I believe increasingly represents a big challenge for employers.

There is growing evidence that UK employees are distracted by money worries, which markedly reduces their productivity. At FinovateFall, von Tobel positioned the company as keen to partner other financial services organisations across the market, stressing a belief that financial planning should not be deemed a luxury.

The final US business I want to highlight is Financial Guard. Headed by former JP Morgan Chase executive Kevin Pohmer, it aims to help individual investors save for retirement. 

Again, this is a service that shows investors what to do rather than holding their assets.

Once online, the user follows a typical know-your-client, risk-profiling and aggregation process to capture the information necessary for the system to generate a holistic retirement plan.

After collating the information, the system produces a single grade – like a grade on a school report – assessing the portfolio. It also tells the client from an asset-allocation and fund-selection perspective what to buy, sell or hold to enhance the portfolio and improve the grade as well as the impact these better decisions would have delivered historically.

The cost of all fees on the portfolio are identified in dollar terms so that the user can understand the true cost of investment and the other charges, including those usually hidden in prospectuses. 

The direct-to-consumer version of the service is available for $150 a year.

In very different ways, all three services deliver exceptional financial advice to US consumers at a fraction of the cost of traditional advice. This is evidence of what can be achieved and demonstrates how similar businesses could emerge in the UK.

At the risk of repeating myself, I see this as the greatest commercial opportunity in the UK personal finance market today. But who will take advantage of it?

Ian McKenna is director of the Finance & Technology Research Centre

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Comments

There are 11 comments at the moment, we would love to hear your opinion too.

  1. Interesting article but what would be useful to know is how much PII, how much the regulator charges in fees each year, how much the compensation levy is, how much time is wasted filling in RMAR equivalent. How strict compliance is I suspect that it is far less onerous to give advice in the US than here therefore making things less expensive

  2. In my time I have looked at Garrett Financial Planning Network. Charging around £50 per hour for face to face advice, her proposition works when you have a considerably higher number of chargeable hours in the day and lower overheads. What became very apparent from looking at how they worked, quite apart from the direct regulatory costs, the throughput of clients was critical to their success – which means not seeing one client for one hour then spending another hour in indirect compliance and regulatory costs of preparing / issuing documentation, client agreements, notes, file records, back office data blah blah …
    It’s a great idea – but unless and until the UK regulator sees their way clear to reducing the compliance burden in terms of time and money I struggle to see how anything like this can be replicated in the UK.

  3. I doubt it would work in this regulatory environment, even so called ‘execution only’ services can’t match that price.

  4. And one wonders how good the advice is? Pay peanuts – get monkeys. Funny that Goldman Sachs charges just a tad more!

    Also it is not clear exactly what you get for the money.

  5. All well and good Ian but since when did we have access to any such systems as they have in the US?Their investments are all far simpler,no Investment bonds or UCIS ,no plethora of pension contracts,tax regimes that change every year, or archaic legacy systems for with profits,unit blinked annuities etc etc ? Great if it comes, but many providers have tried to develop systems that can cope with a range of new and old contracts and failed miserably ( those that have require massive hands on manual input in the back office). Then of course there is the regulator,can you imagine the paperwork ,reviews ,feasibility studies they would require? Oh and when the first client complains that the changes were all made by a computer not a “real” person the industry will see even more compensation claims.Sound good Ian, but lets work in the real world shall we, where we do not even have full platform re reg yet?!

  6. I find these articles a useful stimulus on ideas on how to do things differently in the UK, not just as a ‘cut and paste’ answer with a direct import of a business model from the US.

    Technology has impacted on every aspect of our lives from smart phones to iPads and the ‘there is an app for that…’ expectation. Financial advice should be no different and be subject to the glare of innovation, even if we do have different and potentially restrictive regulation to consider.

  7. Ian never seems to stop harping on about this. If there is such an “opportunity” and you are clearly such an expert in this area, can i ask why you aren’t doing something?
    I can pick up an iphone and say “O look, isn’t this good!” It never fails to amaze me how self important your “reviews” are and how much of an expert you are by clicking on the Learnvest website and regurgitating the About Us section. I’ll have a little more respect if you get into the trench with everyone else and actually do something.

  8. Interesting article, and even more interesting set of comments. To harangue someone who is merely reporting on innovation and developments seems a little harsh. I imagine Amazon received many similar comments when they first announced selling books online, where are all the traditional booksellers now, music, groceries everything is going digital. We can all hide behind all the many good and valid present challenges, but Ian in my view is right, someone will do this and get it right in time, leaving a whole load of naysayers floundering in their wake.

  9. @Rollingthunder Spot on comment…

  10. @Rollingthinder & James Dean

    Not really fair using Amazon as a comparator. Their field doesn’t quite have the regulation we have to comply with and they are fortunate in being able to manipulate their tax liability, which very few of us can do.

    If we had these advantages then dirt cheap advice might possibly become profitable. Always assuming that this firm gives what we term advice. I rather suspect the comparison between their advice and ours is akin to comparing a decent Cabernet to Ribena.

  11. Is that a half full glass of Ribena or Cabernet? 🙂

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