By Zihao Xu on 20th August 2019
Octopus Ventures' Zihao Xu asks, will the digitisation of financial advice also lead to its democratisation?
Let’s face it, most people are terrible with money.
Not just when it comes to monthly budgeting or resisting the temptation of that unplanned shopping spree, but also when it comes to the more fundamental things in life – saving for a home, for a child, or retirement. These are some of the most important aspects of most people’s lives, but it’s hard to know how to balance your daily life with planning for the future, and with so many financial products available it’s almost impossible to find the best deal yourself.
And yet almost 90% of people have to make these decisions either on their own or with their partner. According to Aegon, just 10% of people will seek professional financial advice. There is a well-documented “financial advice gap” in the UK that has only widened since 2015.
Financial advisers are trained to create prudent financial plans that help their clients reach their goals, taking into account all of their circumstances including assets, debts, income and plans for the future. They overlay on top of the wider economic environment to ensure their advice is robust to various scenarios, and assess a wide set of financial products in order to help their clients choose the right ones.
Doing all this is hard, and it’s why financial advisors need to be highly skilled and are regulated in order to ensure they are independent and acting in the best interests of their clients – after all the success of financial planning is one of the most important aspects of enabling someone to live the life they want. However, it’s historically been hard for advisers to serve everyone. The high cost of training and the physical limitations of travelling to see clients means that typically only those in the upper brackets of wealth and with complex financial needs have been able to afford and access an adviser. The associated costs simply make it impossible for everyone to afford.
Now, technology could change things for the better and we may soon see a world in which sound financial advice is totally ubiquitous.
First in line are technologies that are helping financial advisers become better at what they do. Companies such as Hatch, MyEva, and Nutmeg have built various hybrid platforms that enable financial advisers to offload a significant proportion of the data-gathering, data preparation and administrative tasks that come with offering financial advice, freeing them up to serve more clients and do so at a lower cost. In a 2017 report from Accenture on the new face of wealth management, the core recommendation was that the industry should not adopt an either/or attitude to robots or humans – a one size fits all approach is a thing of the past.
And this idea is backed by the numbers – the report found that those in the hybrid model are significantly more likely to have sought and received firm assistance in financial planning than investors in any other model - 64% versus 44%.
Then there are the technologies that remove the human from the equation altogether. When people think about the term “robo-advice”, they often think of the likes of Wealthify and Nutmeg who devise low-cost investment portfolios based on online surveys of attitudes towards risk. However, an investment portfolio is just one aspect of the multi-faceted financial needs that everyone has, and a true advice offering would handle a much wider set of financial recommendations. Multiply* has recently been FCA authorised to do just that, having built an advice engine aimed at people with less complex needs than those who typically need a traditional financial adviser. Since the service is built purely on software, Multiply can offer its services for free to those who are unable to access traditional financial advice.
For the foreseeable future, there will always be the need for traditional face-to-face financial advice. Advisers have seen so many different complex cases, meaning they can handle situations far outside the scope and capability of software-only solutions. Furthermore, there will always be people who need to speak to a trusted human adviser before making some of the most important financial decisions of their lives. With the help of technology, these advisors will be able to help more people at a lower cost. We need a market where financial advice becomes ubiquitous and each part of the market is served most appropriately and effectively. Multiply starts to address this through providing advice at a zero marginal cost to the mass market, which will hopefully go some way towards helping close the advice gap.
Digital technology, with its web-based channels, tools, and applications that enable a more transparent and real-time understanding of a client’s investments, makes hybrid models possible. Accenture found that due to this, digital tools, are now considered a “basic requirement” by a majority of investors. This further supports the idea that a hybrid model of technology and the human touch will dominate adviser human-led financial advice, while the benefits of zero marginal cost financial advice delivered to the mass market could be unparalleled.
We must make the most of the exciting opportunity technology offers in reshaping the financial advice industry and helping more and more people live the lives they aspire towards.