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Ian McKenna: Does US hold key to low-cost advice?

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When planning how to evolve a business, wouldn’t it be great if you could jump in a time machine and look just a couple of years into the future? Once you get to understand the differences in terminology, there are far more similarities between the US and UK advice markets than there are differences. And as the US has been quicker to embrace technology it can provide a great indication of where we might be in time to come.

I recently attended the IN VEST 2016 conference in New York. Twelve months ago this was an event substantially focused on new direct-to-consumer, robo-advice technology. This year was entirely different. Almost without exception, exhibitors and presenters outlined how technology in general, and automated advice in particular, are now overwhelmingly seen as tools advisers will use to build the next generation of financial advice practices.

It was strongly argued that the emergence of robo-advice is actually helping advisers identify more clearly the value they bring. We all know modern portfolio theory, that the right mix of asset classes will deliver far more value long term, and how few asset managers can consistently deliver alpha. By defining a reasonable price for portfolio construction and asset management (at best, 20 basis points) robo-advice is highlighting what it does not currently do – the financial and tax planning part, where far more value accrues.

This pricing reflects what consumers are paying robo-advisers for portfolio construction and asset management in the US. The view there is that such services are becoming increasingly commoditised, with prices falling in time to little more than zero. We have yet to see such price compression in the UK but with more and more US players looking closely at entering our market, this can only be a matter of time.

One firm attracting a huge amount of attention at the conference was United Capital. Led by chief executive Joe Duran it presents itself as an example of what can be achieved by consolidating adviser businesses into an operating model where every possible process has been optimised to make the most use of technology. The firm has 81 office locations and has accumulated approximately $16.27bn under management.

Duran talks passionately about how technology has enabled the firm to limit its number of human administrators, citing an example of a single administrator being able to support four acquired offices and a total of AUA $2bn.

Reiterating the message that price compression in other parts of the value chain can reduce consumer costs while creating revenue for advisers, Duran says the full advice stack (including the product wrappers, asset management and planning) could be offered for as little as 80bps in the near future, with asset and portfolio management reduced to between 15bps and 25bps.

I can see how similar economies could be achieved in the UK and this raises the prospect of making advice far more affordable to large numbers of consumers.

Price compression on the portfolio construction and asset management side of our industry will create opportunities to reduce the cost of advice overall, while at the same time diverting a significant portion of what the client does pay in fees to cover the cost of the planning areas where the adviser adds greatest value. To achieve this, adviser firms need to fully harness technology to drive out costly human administrative processes wherever possible.

I am looking forward to the European InVest event in London in November, as it should be a good indicator of how far we have progressed towards recognising technology as an enabler for advisers, rather than a competitor.

Advisers that adapt to take advantage of these trends can have a hugely profitable future. The only question will be whether individual firms are prepared to do so.

Ian McKenna is director of the Finance & Technology Research Centre

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Comments

There are 2 comments at the moment, we would love to hear your opinion too.

  1. Really interesting and really stark contrast to advice in the UK. Take some of the larger networks for example where the total cost including advice easily reaches 2.5%. 0.3% platform, 1.2% active fund and 1% advice. We have a long way to go.

  2. Spot on Ian. It is a complementary service to full-on advice proposition, not competition. That is why we are adopting online automated advice for segments of our client base, particularly those we haven’t really engaged with in the past and are unable to, at a realistic cost, like employees. This technology will improve profitability, improve service and facilitate different service propositions to different client types, especially the client base of the future through automated advice for simple products, leading to paid for advice when required. Bring it on!

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