Technology spotlight: FAMR Giles

One of the main objectives of FAMR is to deliver improvements in the accessibility, availability and adoption of advice. The government is concerned that a key voter demographic – sorry, I meant hardworking families all over this great land…ARRRGH done it again… The population are not saving enough for their future and that an advice gap has appeared over the last few years. You can pluck your own estimate from thin air as to what level of savings this gap represents, although common consensus is that anyone with less than £75,000 to invest is going to struggle to find a financial adviser who wants to work with them.

However, it is not as simple as the level of investable assets. Research from Citizens Advice Bureau has shown it is more nuanced that that, with availability, awareness and affordability issues all contributing to the overall gap. The affordable advice gap is the most widely recognised category, with 5.4m people being more likely to pay for advice if it were cheaper. If £450 is the typical cost of advice for investing £15,000 in an Isa, then 80 per cent of people surveyed wouldn’t pay a penny.

Over recent weeks there have been rumours regarding possible solutions to address this advice gap, with the suggestion of a reintroduction of commission being the most widely discussed. It kind of makes sense. If advice does cost £450, and the customer won’t pay it, then why not allow the adviser to be paid by other means? While there is a certain logic to this, there is one fatal flaw to this master plan. The customer will always end up paying one way or another.

Using a simple example, if a client is advised to purchase an Isa they will end up being charged roughly 35bps for the platform fee, 75bps for the investment solution ongoing charges figure and, say, 50bps for advice, thereby making a total charge of 160bps. These are just rough example charges, so stick with me if they don’t feel right, however here’s the rub: If this 50bps advice charge is no longer paid directly by the customer as an advice charge, then where does it come from? Who pays the commission?

Neither the platform provider, nor asset manager are going to want to fund this commission without a) putting their charges up to make it revenue neutral, and b) sharing these costs with each other. This means platforms and asset managers would need to develop new charging structures and new commission-loaded share classes. The RDR rules, banning advisers from receiving payments from providers would need to be reversed, alongside the imminent sunset clause changes. Basically, we wind the clock back almost 10 years and start again.

None of this feels like something any part of the industry wants. And – given that this is a tech column – it is why getting the new breed of online propositions (whether or not you call them robo and whether or not you include advice in them) up and dancing.

Importance of advice

I have a study somewhere which was done by LinkedIn in the States on “affluent millennials”, which I’m not sure is a real thing, but we’ll go with it for now. The study (see Chart 1 and Chart 2) asked a bunch of these folks, who are basically the next generation of affluent middle class, if they thought having someone to help with their financial affairs was a good thing. Overwhelmingly, the answer was yes. They were then asked if they wanted that advice or assistance to be in the same format as their parents had. The answer was a resounding no.

It turns out that there are lots of folk who feel more confident serving their own data than having a planner sit with them and do a big ol’ factfind while eating biscuits. And if you can get next to that, then you can start to “lighten” the advice relationship and start to reduce cost – which in turn can make advice more affordable, which in turn can help plug the gap without restarting the commission war.

I don’t think we’re going to see huge uptake for remote advice; we will need people on the ground. But the potential for suppressing advice cost through technology is massive and poorly exploited. What we’ve seen from the companies using Parmenion’s Interact simplified advice tool, and the first generation of robo-advisers, is only just the start.

I know estimates vary, but a decent average for the cost of producing a solid financial plan is probably somewhere around the £1,000 mark; some firms charge a lot more than that (and of course costs climb for those with complex affairs). In my firm we’ve done a bit of work in scoping out how quickly you can get to that same stage with clients self-serving data and the gaps being filled in with telephone calls; and with a good CRM and content management system sitting behind it all. We reckon the time can be reduced down to two to three hours, and this could be produced by someone costing, say, £200 a day. That’s doable now. Advice preparation for under £100 and possibly well under £100 is not very far away.

Yes, regulation sticks cost on top. Yes, client acquisition and marketing needs factored in. But – returning to our starting point – FAMR may well help if it provides the concept of lighter touch regulation or limited liability.

This is why the banks feel empowered to pile back in. Tech is making it easier for them to deliver advice consistently, with systems & controls that could – should – stop them screwing up and being fined again. They also have the customer acquisition side nailed. A massive and (inexplicably) loyal customer base to cross-sell to is a huge advantage that the new robos, or even most adviser firms (bar SJP), do not have.

The good news is the barriers are coming down. It is easier to assemble great tech than ever before, and create an ecosystem that clients can enjoy using – and that builds rapport for when ‘proper’ planning is appropriate. There should be no sacred cows when putting this type of thing together; forget the way you normally do things and work from the ground up. With any luck, FAMR may be there to give you a helping hand.

Mark Polson is principal of platform and specialist consultancy the lang cat