Earlier this year, the good people at the Financial Services Compensation Scheme (FSCS) issued some interesting research exploring present-day consumer attitudes towards financial advice. Some of the findings were quite surprising, although the general public also confirmed a perennial problem embedded in the advice sector – that taking professional advice is considered the province of the most wealthy sliver of society.
First, the obvious issue
Many voices have said that the individuals looking for/hoping for financial security in the future – but by no means well-off at present – are those who need financial advice the most. (It’s obviously a lot easier to stay wealthy once you’ve amassed money and can easily pay for good advice.) But with the current advice model, it is understandably difficult for advice firms to provide their services to those without sizeable assets available for investment and future planning. Firms are not charities and need to charge fees and make a profit from the professional expertise of their highly trained and regulated advisers and planners.
So, there’s the conundrum. And it’s starkly evident from the FSCS’s research.
A big number (55%) of the 1,901 participants surveyed – UK adults aged 18–75 who have financial products – agreed with the contention that ‘paying for financial advice is for the wealthy’. And even more (65%) agreed that ‘those who could benefit the most from professional financial advice can’t afford it’.
What may more concern advice firms will be the views of survey participants with savings, investments, or a mortgage and who were considering seeking financial advice in the last five years. When asked why,
- 22% of this cohort thought that getting regulated advice was ‘too expensive’,
- 23% believed they hadn’t got large enough savings and investments to interest an adviser, and
- 14% were ‘not confident they’d offer value for money’.
Okay, it’s no shock to learn that advice offerings are considered to be unaffordable by a segment of the public, although when the current client list nearing or in retirement is replaced by the next generation of potential clients who’ve missed out on the leg up their elders got via considerable housing wealth and/or large DB pension pots, firms holding on to today’s full-fat advice paradigm may struggle to get enough clients on board.
There’s no escaping the fact that younger people, currently referred to as Millennials and Generation Z, represent advice firms’ future income stream. Isn’t it important for firms to draw them into their business ecosystem before it’s too late to attract them?
A mixed picture
Unsurprisingly the research showed that many people had not sought any financial advice in the last five years. When averaged across all age groups and genders who had savings, investments, or a mortgage, only 36% had looked for financial help in that period. But, very surprising amid all that market volatility, workplace disruption, booming inflation and rising loan and mortgage rates.
Digging deeper into the age groups here, I was surprised to see that a majority (54%) of those aged 25-34 had apparently sought out ‘financial advice’. I can understand why the FSCS reports that this is possible because “these younger groups are taking more unregulated advice and guidance which would not be protected” and “are confused about the definition of advice”. We could examine where the young are getting recommendations on where to invest – is it down to social media chatter, online influencers, or maybe that chap in the pub going on about crypto? – but that would require another survey.
Now here's the thing that surprised me the most. After having previously paid for regulated advice, only 62% would use the same advice service again for a similar purpose. This is counter to OpenMoney’s 2021 report indicating that over 9 in 10 individuals found regulated advice helpful. Does this mean dissatisfaction is growing among advised clients? Or is it because of the new cost of living pressures on these people? Or some other reason?
This ‘only 62%’ figure gives me much food for thought.
Where do we go from here?
On the assumption that the way regulated advice is currently priced and delivered to clients may be undone by demographic changes, a key question pops up for all of us involved in the business of supporting the advice sector. How will we help the many individuals who need and deserve sound, regulated advice for their financial wellbeing but are currently excluded?
I propose two potential routes to opening up professional advice to a wider market of deserving people:
- Reduce the price for clients by providing hybrid advice, which combines automated digital processes with the human touch where essential. We believe this could prove to be up to 50% cheaper to provide than traditional advice as currently constituted.
- Cut the price by a large amount via streamlined advice that is made available in a wholly digital manner. In a pure digital journey, algorithms present a recommendation, and the suitability report is automated, which could be up to 90% less costly than conventionally provided advice.
I’m sure that quite a few advice firms will be less than keen to change their pricing model right now, but the reality is looming as current client numbers ebb away. In my opinion, firms should at least look into using hybrid and digital approaches to lower the cost of giving advice, which in turn offers scope to cut the fee per client.
We can help with this at EV, with our suite of user-friendly tools designed to encourage people at the start of the advice journey to engage with their finances and move into the advised realm in an affordable way. The human interaction from advisers would kick in when investors’ needs get more complex – and when, later down the track, they have amassed enough savings to merit and pay for full-on financial advice and planning services.
The benefits of ‘hybridising’ an advice business are there for the taking. It’s all about increasing the firm’s market share, future-proofing the value of the business by accommodating the next generations, and maintaining a profitable performance while broadening access to reliable regulated advice that will enable more people to head for a more prosperous future.
And the future makeup of the ideal advice firm? I believe the best set-up will be one that blends guidance nudges, digital advice and human-delivered advice. Each firm can implement a mix that suits their target client segment, but truly all firms can reap the advantages of using technology in this more profound way.
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