The industry is going to start to hear a lot more about 'do it with me' investing, writes Ben Goss, chief executive of Distribution Technology.
Walk into your local supermarket and, more likely than not, you'll find a bank of self-service checkouts. If you don't mind sacrificing human interaction with a store assistant you can often jump a much longer queue. And, like them or loathe them, they are here to stay as retailers follow through on their strategy of driving down their cost to serve.
Gaining financial advice is of course so much more complex than buying a can of baked beans. Despite technological advances in recent years, there is still no substitute for good, professional advice from a trusted adviser. In fact, we believe the demand for professional advice will increase, especially from those preparing for or living in retirement, particularly in the face of volatile market returns and a heightened awareness of risk.
The challenge though is that, in the post-Retail Distribution Review (RDR) world, the cost of delivering advice and ongoing servicing has been thrown into stark relief against the fees that can be charged. Commission hid many inefficiencies in our market and, with commission now removed, wealth advisers' cost to serve is clearly too high.
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As a result, advice firms are having to segment their clients and are focusing on higher net worth individuals with investable assets of at least £100,000. Much of this results from the fact that advice and associated client servicing are largely manual, paper-based activities which can take a long time to deliver.
The average piece of investment advice requires six hours of adviser time, very little of which is actually involved in giving meaningful advice. Assuming an average ongoing adviser charge of 0.75% and a need to earn £125 per hour (in a regulated environment and with overhead support costs) you reach the figure of £100,000 of investable assets as a viable customer.
As an industry we need to do all we can to help advisers and wealth managers adopt efficient processes and systems so the cost to serve clients is radically lowered. We are strong supporters of the RDR aims and objectives in helping to professionalise the financial advice industry, but at the same time we recognise that its introduction has put many demands on the adviser.
Risk profiling tools
In addition to RDR, much more is now expected of wealth professionals. Risk profiling, for example, came of age in 2011 when the Financial Services Authority published its first consultation guidance paper on assessing suitability.
Back in 2003, when we started Distribution Technology, only 3% of advisers risk profiled their clients; how times have changed. Now advisers must evaluate not only the client's attitude to risk but also their capacity to take it. This is not an easy thing to do without a good understanding of the risk the client is already taking and a forward looking financial plan.
Just as the processes and techniques around risk profiling will continue to develop, so will those around profiling funds. Most major fund groups now have at least their multi-asset offerings profiled, which helps to ensure an ‘apples for apples' comparison between the client's profile and the investment profile. We expect this will continue to prove a critical role for wealth technology and many consumers already expect to use basic versions themselves, particularly for simpler decisions... ‘Which funds in my company pension scheme should I invest in?' ‘Which ISA should I buy?'
Consumer-facing tools are ideal for helping investors with modest savings or investments to think about the key dimensions of an investment decision. As travel agents have transitioned from 100% face-to-face advice on simple holidays by providing an online presence, so many wealth firms will need to do the same with their low value investors and corporate schemes.
We believe that the industry is going to hear a lot more about ‘do it with me investing' in the coming years. Here, clients carry out some of the work themselves, such as completing an attitude to risk questionnaire or researching funds and, in return, the adviser is able to offer a service at a lower cost.
In this way, technology will enable advisers to offer profitable and viable services to a wider client base. In fact, we believe, based on a 2012 study by Deloitte, that by making better use of integrated technology, a further 3.4 million ‘mass affluent' individuals can gain access to professional financial advice.
While we are confident that advice firms can transform their businesses through better adoption of technology, and will therefore want to look at this area more closely, we also feel that there is a role for the regulator.
Without endorsing any specific companies or products, the Financial Conduct Authority (FCA) could offer examples of good practice in this area, while at the same time providing guidance which helps and encourages advisory firms to evaluate and adopt technology. HM Revenue & Customs goes further, kite marking solutions which meet its standard for online tax return submission for example.
Wealth technology can reduce the cost to serve clients and increase access to advice, while at the same time raising standards and consistency of good practice. For the FCA, surely that is a good thing when the issue at hand is so important, not just for the industry but for the country too.
Ben Goss is chief executive at Distribution Technology
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