Do D2C Sipps compete with financial advisers?

Harnessing technology, the internet in particular, is driving this expansion. In comparison to other online retail markets, financial services are relatively late to the party. Just 15 years ago, very few financial transactions were handled online. Internet banking was still in its infancy, smartphones were but a twinkle in Steve Jobs’ eye, and financial products were distributed largely by banks and insurance companies via tied agents and financial advisers. The concept of buying financial products online, and continuing to make investment transactions within them, was largely alien and wholly scary to many. Savers were not ready to place their money and their trust in their desktop PC.

Changing times

It says a good deal about both the changing reputation of financial services and the shift in consumers’ willingness to embrace and place trust in technology that so many savers are now willing to turn to self-directed solutions online as an equally viable alternative to seeking personal advice. It is a demand that so many providers are looking to capitalise upon, and pension investors are a captive audience, but where does that leave the role of the adviser?

Technology has empowered the saver but it also presents them with other challenges. Consider the first-time saver. Perhaps they have just changed job and want somewhere to look after their £30,000 pension fund. There is a bewildering array of different self-invested personal pension (Sipp) providers, platforms and online brokers to choose from.

Savers are normal consumers and will therefore tend to make irrational decisions that may or may not turn out to be successful. Few know exactly what they are looking for and will not follow the same due diligence processes that an adviser would undertake before making a recommendation.

It is inevitable that the majority will be driven by headline prices for key services, irrespective of whether or not they will end up using them. Providers know this, of course, and how they advertise will not have escaped the attention of many advisers.

Astonishing choices

If the choice of providers is bewildering, the number of investment options now available to transact online is simply astonishing. Thousands of collectives await our novice saver, alongside equities from not just the FTSE but other markets as well. All come with differing levels of descriptive information, performance data and risk profiles. Many are backed up by big-budget advertising and sponsorship deals. Once again, the decisions that the novice (or by this stage, even relatively experienced) saver makes are likely to be largely irrational and not closely linked to their goals.

An adviser can add value to most decisions that a saver needs to make. But the most important decisions needed still tend to be those ones where technology has yet to make an impact, or perhaps where providers are less concerned about their need to play a role.

Advised or direct, Sipps are about saving, investing and income: the accumulation of money, investing for a return, and drawing an income in retirement (or buying an annuity). They are the ‘how’, and direct-to-consumer providers’ technology solutions are catering for the ‘how’ increasingly well. But they are not the ‘why’. Why is the saver doing what they are doing, why are they saving a certain amount, why are they investing in certain assets, why are they drawing a certain level of income?

To date, direct-to-consumer propositions have little stake in the ‘why’. Business models are built upon the acquisition of new savers, retention of existing savers, volume of investment transactions and, perhaps, new regular saving from savers. Few tools are available to deal with the ‘why’ because there is little need outside fulfilling the limited obligations laid down by legislation and the regulator. An online investment platform cares not if our novice saver simply wants to try to get a better return on their £30,000 or whether in fact this money is for something specific, a personal goal at a specific point in time.

Adviser stake

Advisers solve the ‘why’. They ask questions that savers often do not think of asking themselves and help clients arrive at the right solution for them. They react to the changing financial circumstances of savers and changing goals as time goes on. They understand legislative and market changes and help the saver change and capitalise on what is best for them. They help the saver understand the ‘why’ and bring it to life for their own individual goals.

But their value to the businesses that also provide direct-to-consumer solutions is in question. Advisers appear to have little additional influence on the business model drivers listed above, save offering some additional support to the acquisition of new savers. To some providers they may even be an inconvenience, requiring different service models to support them, facilitating their fees for work performed on behalf of the saver or additional regulatory reporting.

They are also in competition. Advisers can not only introduce new savers but they can also move them away. There has long been a sense of unease between advisers and providers who also offer solutions direct to the consumer. That has increased post-RDR as more and more providers who traditionally supported the advised channel also unveil their direct-to-consumer propositions.

The two solutions need not be separate – they should complement one another as both have the same saver at heart. But the direction of travel in the market seems to be the opposite, distancing them apart with savers segmented into one or the other. That risks not supporting the saver in the best way possible and certainly does not look to support the role of the adviser.

Post-RDR, the shape of financial advice is changing too. You cannot simply generalise the whole advice market as being identical but there are patterns emerging, particularly to cater for mass-market savers. Not all clients want, or are willing to pay for, ongoing financial advice. Some still do, but others will want an adviser to help them with certain transactions, dealing with life and financial events as they occur. They will want to dip in and out, taking advice on demand, making the best of both worlds.

Direct-to-consumer propositions that place so much emphasis on the investment experience will doubtless continue to do well. Indeed, it is often said that the journey, not the destination, is the reward. That may or may not be true when it comes to Sipps but it is important for savers to remember why they started on that journey in the first place, what their end goals are. Savers who choose providers that not only support them but their advisers when they need them will find both journey and destination more to their liking.

Greg Kingston is head of marketing and proposition at Suffolk Life