It’s a buzzword that describes a serious problem: almost everyone needs some kind of financial guidance or advice – yet, there just isn’t enough of it around.
Technology, particularly “automated advice”, we’re told, can provide a solution by serving lower net worth clients with non-complex issues. This is undoubtedly true but if you think this is the limit of the role tech should play, you misunderstand the nature of the advice gap.
Because a major part of the advice gap is actually the “advice capacity gap” and the role of AI and machine-learning – far from replacing advisers – is to support them by increasing their capacity to advise.
Where did the “advice capacity gap” come from?
To answer this question, it’s worth reminding ourselves of the unintended consequences of the well-intentioned Retail Distribution Review (RDR).
First, it ushered in higher educational standards that required tougher exams. The result was not only a higher bar to entrance but, at the other end of the career ladder, many decided to retire early, rather than stay on and study.
Next was a tightening of regulations that saw big firms absorbing significant costs to ensure Training and Competence controls were in place. Many institutions – from banks to building societies, investment managers to stockbrokers – simply gave up advising or massively reduced their advice functions.
Third, commission was banned and upfront fees swept in, which were harder for consumers to stomach when they had considered financial advice to be free.
Where does that leave us?
We now have around 26,000 regulated financial advisers – down from a number many multiples of that 15 years ago. The FCA’s FAMR 2018 baseline survey showed that 4.5 million UK adults took regulated financial advice over a 12 month period. Yet a further 18.2 million had £10,000 or more in savings and/or investments and might have needed advice – but didn’t take it.
If anything, the potential market is growing because more money is being inherited and more people are drawing down funds under new pension freedoms. The fact is, with income protection, life cover, workplace pensions, mortgages and more, nearly all of us would benefit from advice.
Too few advisers – with too little time
While society has too few advisers, the advisers themselves have too little time. Our own research recently found that advisers were losing an average of 43 working days a year conducting tasks that could be automated. They included fact finding, risk profiling, market quotations and drafting suitability letters.
Some advice is even more complicated. I recently conducted a very detailed time and motion study around “at retirement” cases at one firm and they were taking 34 hours on average. I estimated 20 of those hours could be removed using technology.
Computers can, for example, churn through reams of data in seconds, making complex cost calculations to compare different pension schemes. Of course, some parts of the process are currently better done by humans, like chasing down lost pensions and the soft skills of reassurance, but what tech also does is offer consistency.
Once you've input rules about a client’s situation into an algorithm, along with their requirements and aspirations, tech can consistently produce exactly the same advice for consistent cases. This is a major boon for compliance departments because it makes casework robust, consistent and auditable.
The future – “piloted advice”
There are many processes we can conduct digitally with no human involved. We can give that advice under corporate sign-off so, while fully regulated, it comes from the firm (or the computer), rather than the individual CF30 financial adviser. When clients want a more personal experience, we can use a regulated financial adviser.
But there's also a middle ground in which the system is making the decisions and humans are used as “pilots” to the automated system.
The role of the pilot is to help a customer through, to check that they're not misunderstanding anything and to refer the client to a qualified adviser, should they need one. They could not change or overwrite decisions made by the computer and, of course, the pilot would need to ensure they avoided straying into personally offering advice.
This could mean that paraplanners or even anyone with great telephone manner could deliver “piloted advice”. The upshot of such an innovation would be that firms could take on more clients and still maintain a quality planning service.
Advice doesn't have to be fully digital, D2C and totally automated. Equally, it doesn’t have to be done fully by an expensive, fully qualified adviser. In between options, like piloted advice, will evolve.
All three models and many more are going to exist – it's certainly not a case of eradicating advisers.
Instead, a whole middle ground will emerge, where firms will use people to give reassurance and to pilot people through a process. But actually, it will be the system doing the advising, not the individual.