March 28, 2019

So where are we with the advice gap?

Simon is Business Development Director at Wealth Wizards, with over 20 years' experience driving the development of automated financial advice.

Turo in the media
2019 is the year the original recommendations of the Financial Advice Market Review (FAMR) is set to be reviewed in full by the Financial Conduct Authority (FCA), writes Simon Binney.

While we wait for the results of the assessment, it is worth reflecting on the progress that has been made since the advice gap was called out in the final FAMR report in 2016, which noted a gap that was "particularly significant in relation to pensions and savings".

The recommendations outlined in the FAMR report were aimed at providing affordable advice to consumers, increasing the accessibility of advice, and addressing industry concerns relating to future liabilities and redress, without watering down levels of consumer protection.

Since 2016, the FCA and HM Treasury have implemented a range of measures that FAMR recommended. Many of these were aimed at reducing costs for advice firms and supporting them in developing lower-cost options for consumers.

Recommendations included setting up the FCA's Advice Unit; developing automated advice and guidance models; giving guidance to support firms wanting to develop new services; giving advisers more time to complete their training; and working to reduce the time advisers spend on suitability reports.

Three years on and the sector has seen many changes as a result of FAMR, as well as the introduction of other measures such as automatic enrolment and pension freedom. Combine this with the pace of rapid technological development and you have a cocktail of complexity with firms and advisers reinventing business models and core strategies in a bid to navigate the transformation. But what impact has this had on the advice gap?

Encouragingly, the latest FAMR 2018 baseline review survey, measured against the benchmarks set in 2017, showed improvement. It indicated 4.5 million UK adults had taken regulated financial advice in the last 12 months, up from 3.2 million in 2017.

It is unclear exactly what has driven this increase in demand and perhaps this is something we will discover in this year's full FAMR review but, before we start celebrating too soon, the same research also suggested there will continue to be an advice gap.

Results show that relatively few adults, who had not been advised, undertook actions related to a pension - 7% started or increased monthly payments into a private pension; 5% said they made changes to the funds in which their pension is invested; and 1% took out a new personal pension.

Additionally, ‘not advised' adults were asked whether or not they thought they would use regulated financial advice in the future. Just one in eight (13%) said they definitely would, while a further two in five (40%) felt they might.

As highlighted in the FAMR report, automated advice is going to be key in helping to address affordability and access to financial advice. And, in its own attempt to stimulate innovation and drive adoption of automated solutions, the FCA established the FCA Advice Unit.

While it was never going to generate solutions overnight - technology development of this kind takes careful development and testing - it has recently announced that 29 firms have been successful in their applications to begin testing innovative products, services, business models and delivery mechanisms in the fourth cohort of the sandbox.

What else? Well, in the backdrop of the FCA's support for nurturing innovative solutions, there has been a flurry of market activity with introductions, mergers, acquisitions and investments in the growing robo-advice and automated advice sector. The market has grown hotter and hotter with high-profile examples setting the pace, such as JLT Employee Benefits acquiring Moola and Money Farm buying Vaamo to access the German market.

These investments and new partnerships have confirmed the now widely accepted view that digital platforms will be one of the biggest solutions to addressing the advice gap - particularly in light of changing demographics.

In just a few years since the original FAMR report, the millennial generation is now staring the 40s in the face while the older of the Gen Z crowd are leaving school and heading to their first jobs and university. This is significant as the focus may be on capturing the attention of retirees and baby-boomers as they draw down their pots, but actually the future of any advice firm will be decided by the digitally-savvy pension savers of the future.

Reaching all of these different groups is going to take a technology-led solution in order to crack current challenges of rising overheads, a lack of advisers and perception issues. In fact, the use of technology was recognised by respondents to FAMR. They gave encouraging messages about the potential for future development in the market, including using technology both to reach currently disengaged consumers and to bring down the cost of advice through innovation.

Those businesses with foresight have worked hard to integrate automated solutions into their business models since - and, in some instances, before - the FAMR.  In fact, 70% of firms in 2018 said that they were prioritising investment in digital technologies.

One example of this is LV= using the Wealth Wizards Smart Platform as part of its financial advice business. With our technology, LV= can create a recommended solution and an advice report for the customer in just two hours, compared with a typical industry standard-case preparation time for ‘at-retirement' advice of between seven and 15 hours. It is therefore clear to see how regulated automated advice solutions can transform an advice firm's business model.

Financial worries

We should also not forget the progress that has been made with automatic enrolment and the role of employers in helping employees to access advice. Employers have started to realise that financial wellbeing is key to the productivity of their employees.

Some nine out of 10 employers (88%) believe staff worry about money - 86% to the extent that it affects their performance at work - and one in six people have suffered mental health issues as a direct consequence of financial worries. Over the past few years, there has been a significant rise in the number of employers looking for providers to guide their staff.

What is interesting is that, while use of automated advice is still to gain momentum, awareness is growing. The FAMR 2018 survey showed a growing awareness of automated solutions - almost two-fifths (38%) of UK adults have heard of at least one of the automated online investment and pension services included in the survey.

This is a significant increase from the one in 10 (10%) who had heard of at least one automated service in the 2017Financial Lives Survey. As familiarity grows, as stories are shared and as the trailblazers using automated advice report success, then the snowball will start and the advice gap will close further.

As we await the 2019 review, it is clear the market has seized the day and is making strides in meeting the challenge of the advice gap - however it is yet to be seen whether the FAMR recommendations have truly made enough of an impact.

The big challenge now is for the industry to better market itself to a confused and disenfranchised public. If there is one recommendation the next FAMR review could make, it would surely have to be to force the industry to better communicate products and solutions in a more accessible manner. We have the innovation and the technology. Now let's tell the nation.

This article was originally published in Professional Adviser

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