For all the FCA’s very real and laudable efforts to stimulate growth in the digital advice sector, the barriers to entry remain high. Any adviser thinking they can go it alone and build their own digital advice proposition from scratch is going to need deep pockets, some very clever people and a lot of patience. By contrast, white-labelling a proposition that has already jumped through the hoops set by the regulator remains the fastest and probably most cost-effective way for advisers to bring robotic advice and paraplanner functionality into their business model.
So committed is the Treasury to nurturing – and, post-Brexit, retaining – the UK’s growing fintech sector that it wheeled out both the Chancellor of the Exchequer and the Governor of the Bank of England to its International Fintech Conference in London a couple of months ago, to spell out to journalists and potential investors the many reasons why Britain is the best place to set up shop.
Hammond and Carney made a pretty decent case as to why the UK, and particularly London, will continue their dominance of key parts of the global financial system – I for one hadn’t known for example that there are more US banks headquartered in London than in Wall Street.
But another key element of their pitch was the extent to which the UK regulator is unique in its flexibility when it comes to promoting new business models.
It is a fair claim - one that is particularly pertinent to organisations' thinking of setting up digital advice and guidance propositions. The FCA’s open door policy, typified by its regulatory sandbox and innovation hub, which enable businesses to test innovative projects, services, business models and delivery mechanisms in a live environment, is a perfect example of why our own regulator can be described as cutting edge.
But sitting in on a session on robo-advice at the International Fintech Conference, chaired by the head of the FCA’s Advice Unit, it soon became apparent that while buying one in can make sense, building your own digital advice proposition is not going to be easy. Despite the regulator’s willingness to engage, the barriers of entry to companies wanting to self-build advice propositions are significant and numerous.
Not surprisingly, the sheer complexity of the regulation has proved to be a key factor. With around 10 different definitions of advice, any adviser wanting to build their own robo proposition is going to have to develop a pretty clear understanding of where they want to play, what the price point is for that segment of the market, and what the regulatory consequences of playing in a particular area actually are. The FCA’s push on innovation may have made life easier, but this is still not straightforward.
Time and money are other key factors. Despite the FCA’s efforts to streamline the process, there is often a long wait involved to get a license to operate, sometimes up to a year. That’s a long time to wait before you can start to make money out of the proposition that will probably have cost you millions to get to market.
What’s more, to get access to the valuable business consultancy support that the FCA’s Advice Unit doubtless offers, you have to be able to convince them that your proposition will deliver consumer benefits in terms of lower cost advice, to segments of the population that are currently unserved or underserved. While robo propositions for retiring DC members probably fit the bill, advisers who think the regulator is going to bend over backwards to help them develop a more cost effective way to deliver advice to their existing high net worth client base need think again. And even if you do get a proposition to market, if it is full advice, there is still regulatory work to be done on an ongoing basis staying on top of whatever tax and regulatory changes the Government brings in.
The cost of acquiring clients is high and so it is organisations that already have clients who have the most to gain from robo-advice, or from weaving robo elements, such as paraplanning, into their proposition. Some say that that five years from now every bank will have a robo-adviser, but financial advisers also have strong connections with large books of clients they are currently unable to serve because, under their current business model, the numbers simply don’t stack up.
The reality is that for most advisers, building their own robo-advice proposition is so far from their core competence that it makes no sense. Where I do see this market growing is in advisers buying plug-and-play propositions off the shelf that drastically cut their staff costs, improve both consistency of advice and audit trails and increase the profitability of their businesses.