Individuals are increasingly realising that they need to purchase more financial services if they ar...
Individuals are increasingly realising that they need to purchase more financial services if they are to look after themselves and their families, particularly in retirement. The belief that social security will not be there for them when they need it is now firmly planted, although in reality I suspect it will remain as a better safety net than most people think. Politicians like to get themselves re-elected and promising to reduce or do away with social security is not always the best way of doing that.
However, it will undoubtedly be necessary to save more than at present for a comfortable retirement, so government policy is potentially providing a greater market for pensions than it has in the past. But it is also constraining the services that the industry will be able to offer commercially.
One way of ensuring that a firm can meet the requirements of a client within the cost constraints imposed by the Government and the regulatory impact of the Financial Services Authority (FSA) is by using technology.
The past two years in particular have resulted in revolution in the use of the internet. As little as four years ago the internet was still considered a medium for use by anoraks, nerds and train spotters. But it has now gone from a minority interest to being one of the main games in town.
It is a business in itself, but perhaps most importantly from the perspective of the financial services industry, it is a means of delivery.
One widely hyped use of the internet for financial services is execution-only broking. At APCIMS we produce quarterly statistics showing what is happening in the market. The quantitative figures are produced by ComPeer and the qualitative ones are the views expressed by our members.
Last year the internet started to become a popular route for execution-only broking. So we made a projection that we expected the use of the internet for execution-only deals to double every quarter. Most of the commentators told us we were wrong, that we had overestimated and that this would never happen in so short a period of time.
In fact use of the internet for this purpose has more than doubled and now the accusation is that we underestimated the interest in internet broking.
The numbers are big. In the first quarter of this year six million trades were undertaken for the private investor. More than four million on the no-advice route; one million of these on the internet.
There are a number of reasons why this interest in shares has grown, including a bull market, consumer confidence and the amount of information available in the public domain. People having money available is another reason as is ease of access.
The two most incorrect statements about the internet are that it will mean the end for the financial services industry as we know it and that the internet means there will be no change. The truth lies between the two and those who provide what their clients want, hopefully even before they have requested it, will be the ones who will not only survive but also will prosper.
Is this happening for execution-only broking only? The answer to this is no. Discretionary and advisory business is increasing as well and those of our members who offer an internet service to clients giving them access to portfolio valuations and related services have found the take-up dramatically higher than expected.
The internet is not just for the young. While the maximum age for programming video recorders is still about 14, the young and the old alike use the internet. In fact I am part of the squeezed minority. I have not had time to do much other than learn how to click on the mouse and try to delete the 'We are the Borg' screensaver which my sons keep putting on the computer and to buy the odd no-frills aeroplane ticket.
Financial services lend themselves to the internet and are second only to pornography in being its most popular use. The internet allows you to access information and gives you the ability to act at the same time and, once you have bought the financial service, a lorry is not required to pick it up from the factory and deliver it to your home.
So will we all turn into a nation of nerds who shop on the internet, get our entertainment from the internet, play games on the internet, find our true loves through the internet dating agency, and if all fails download pornography? Well clearly not, but its use should not be underestimated as this technology has jumped the normal generation gap. What has happened with the execution-only sales and purchases of shares can happen with other financial services tomorrow - including pensions, self-invested personal pensions (Sipps) and even financial advice.
Delivery of advice
This means of delivery is becoming increasingly important to the financial services industry as what it can charge for gets squeezed. Public policy is currently about ensuring people have access to financial services that are safe but without having to pay for advice.
A proposition that marginalises advice in this way is of considerable concern, but it is the one which we have to deal with. It is from this policy that developments have come such as the Cat-standard Isa, the conditions that surround the stakeholder pension and the league tables which the FSA is going to be charged with the responsibility of drawing up.
These league tables will be drawn up for simple products based primarily on costs, with those for financial advice based on the sum charged. To the innocent observer looking for information, cheap may well be regarded as being synonymous with best. This is a dangerous assumption.
The public policy intention is for the majority of people to purchase their financial product advice free.
Despite this, financial advice is not yet dead. Many people do not trust themselves with their own money, while others simply do not have time to handle
Paul Bruns and Elaine Parkes
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