It is an understatement to say that regulation is now at the heart of the financial sector. Since the 2008 financial crisis, we have seen the adoption of new regulatory requirements in a bid to strengthen the sector itself, protect individuals, and mitigate the potential for any crisis in the future.
One of the key changes in the advice sector was the Retail Distribution Review (RDR). This saw a ban on incentive-driven sales paid for by commission and destroyed the advice model used by the high street banks, which saw the banks then leave the sector in droves. While this crackdown on poor practice was undoubtedly positive for savers and investors, it meant many advisers left the market entirely which contributed to the advice gap we now have in the UK.
Aside from the RDR, we have also seen other directives such as the second Markets in Financial Instruments Directive (MiFID II), pension freedom and the Financial Advice Market Review- all intended to improve transparency, market efficiency and investor protection. In response to these rapid changes in the advice ecosystem, firms have had to work hard to keep up and remain compliant with the range of regulation and legislation that have been introduced.
The good news is that technology is proving itself as a way to deliver effective solutions to many of these changes in regulation. After all, from the ashes of the financial crisis rose a myriad of start-up fintech companies that are now powering some of the biggest financial advisers through partnerships, acquisitions and buy-outs.
So-called ‘regtech' uses some of the same technology as fintech providers to help regulators and supervisors in monitoring compliance. Regtech solutions are designed to ease the burden on financial services companies by using technology to simplify or automate parts of the compliance process - whether that is monitoring risk, keeping track of new regulatory changes, or generating reports. Like fintech solutions, the idea is that it will not only reduce time and effort for firms, but it could reduce costs.
Standalone regtech is not the only way in which technology can help ensure financial services firms are compliant. Automated advice solutions can also help with compliance issues as they provide consistent, robust and unbiased advice for investors and, importantly, have a full audit trail for advisers. Used as part of a hybrid advice model, these can save advisers significant amounts of time in managing compliance processes.
What has become clear over the past few years is that a tech-driven response to regulation requires collaboration. This is collaboration that the financial advisory sector has not experienced before. Collaboration with start-ups and innovative companies that provide technology solutions; technologies that are alien to established advice firms - whether regtech or fintech.
There is no shame in the advisory sector not being experts in how to create algorithms that support the advice or paraplanner journey. There is, however, the need for advice firms to embed digital at the heart of their strategies not only to meet regulatory requirements, but also to solve some of the major challenges such as fees, manpower and servicing the growing numbers of investors.
Yet, not only are developments in technology like regtech and fintech helpful for the sector, they are also helpful in closing the advice gap created by a reduction in advisers, and a market that is heavily focussed towards the wealthy. With this new technology we are beginning to see banks now starting to turn back to advice provision and technology can enable providers to support people who have a smaller amount to invest through reduced costs to the firm.
The augmented adviser is the adviser of the future but selecting the digital platform that is right for a particular advice firm needs careful consideration. Will the platform mimic my house style? Does the software feature the latest in technological development and artificial intelligence? Can it effectively provide essential compliance support?
Sometimes, the best way forward is collaboration with existing providers, with strong track records of success. As an example, LV= uses Turo, Wealth Wizards' advice platform, that is designed to work hand-in-hand with LV= advisers to create a hybrid model that is part human adviser and part automation.
Turo does the heavy lifting of fact-based data collation, automated quotation feeds, solution mapping and suitability report generation and leaves the adviser free to focus on customer-facing and relationship building tasks. The benefits are significant - for example, LV= can create a recommended solution and an advice report (suitability letter) for the customer in two hours compared with a typical industry standard case preparation time for ‘at-retirement' advice of between seven and 15 hours in the advice practice.
Looking ahead, regulation seems likely only ever going to get tighter and so financial advisers will need to get better at being able to prove their decisions were the correct ones. Automation will help with this, as well as increasing efficiency, and so the augmented adviser of the future could be the saviour for advice firms who face rising costs, reduced fees per case as volume drives prices down and increased compliance processes. The good news is that it has never been a better time for a firm to select the right tech partner - whether regtech or fintech - because collaboration is key to a thriving sector.