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