IFAOct 17 2018

Hybrid model is making inroads

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Hybrid model is making inroads

Advisers who understand the interplay between trust and satisfaction will make an exponential difference to their business, and to their client outcomes.

The only surprises about the advice gap are that it is not a lot larger than it is, and that it is not a much hotter political potato. 

The advice gap matters because financial advice is the best response we have to one of the most significant crises facing the UK – the retirement crisis. It currently takes a million pounds of investible assets, at an average annual return of 3 per cent, taxed at 20 per cent, to earn the mean personal income of £24,000. 

Investors realise they need to act, but the task is a daunting one. They are confronted with a choice of literally thousands of funds, all of them offering uncertain outcomes, most of them requiring complex management and many of them expensive to the point of self-defeat. This has led to a sharp increase in demand for advice.

Market data back up this growth in demand. According to figures collated by Platforum, assets under advice in the UK now total £521bn as at September 2018; this is up from £64bn 10 years ago and a rise of 25 per cent since 2016. 

The questions we need to answer are not whether advice is needed or why, but how it should be delivered and what it should look like.

It was from this starting point that Vanguard launched its 2018 UK Adviser-Client Survey. This is the result of interviews with 1,000 advised clients, 90 per cent of whom had been with their adviser for three or more years, 85 per cent having assets of more than £100,000.

Some of the findings confirmed what many of us have suspected. Others were a surprise and may lead to further research. 

Key Points

  • There appears to be a gap between what clients (and advisers) rate as important in advisory services, and what clients feel is actually delivered
  • Advisers are deploying automations in ways that seem to have the potential to help close that gap
  • It is at the interplay between trust and satisfaction, between basic and holistic services, that advisers are at their most powerful

Perception gap

Advisers and clients consider the services offered by advisers as valuable – it would be curious if they did not. But there appears to be a gap emerging between what advisers say they offer and what clients report they are receiving.

While advisers report delivering a high number of services, the rate at which clients report receiving those services is far lower. 

There may be a number of reasons for this. One is that advisers may be overconfident in assuming that their clients understand what they are doing and why.

Another might be that some advisers are struggling to communicate the value of their offering. Our sense is that it is the latter rather than the former, but it is a point that might warrant further research. 

Interestingly, when we asked advisers to value the same set of services in terms of revenue, there was little discernible correlation either with what clients valued or with what they felt was being delivered. A slightly worrying observation was that the most lucrative services are those that are easiest to automate. 

Automation

We tend to think of automation as ‘us and them’. There are robo-advisers ‘out there’, their massive, mindless algorithms chomping up market share, while human advisers work courageously on from the trenches, ‘over here’.

The evidence does not really support such a view. The relatively slow uptake of pure robo-advice offerings, both in the UK and the US, suggests to us this is a model that will likely remain at the margin.

According to the survey, what is actually happening is that advisers are developing a hybrid model that combines automated processes and personal interaction, a model that, in our view, has significant potential to close the perception gap by freeing time to communicate value.

We asked advisers to indicate which of their services they were automating, they intended to automate, or that they expected never to automate.

What the research found was that in many cases a large proportion of core services were already automated, or were in the process of being automated. These services included reporting, rebalancing, risk profiling, asset allocation, portfolio management, fund selection and cash flow projections.

This suggests that, at least in the near term, the competitive risk from automation is not the pure-play online service, but the adviser across the street.

If your closest competitor is automating more than you are, he or she is likely to be reducing costs, speeding up processes and freeing up time to focus on building good client relationships and offering more holistic financial planning services, thus showing more value to clients.

That is the tactical threat, the threat most advisers need to think about in the short to medium term.

Longer term, the evidence points in a different direction. Among advised clients who mix a personal financial adviser with a robo offering, 80 per cent were under the age of 40, while only 5 per cent were over 60. Among those who would be likely to shift to robo-only, 60 per cent were under 40, while only 8 per cent were over 60.

There was a further qualitative skew in the data, which we thought was especially interesting. This was that sophisticated investors were also strongly represented among those most inclined to increase their use of fully automated services. 

If your younger and more sophisticated clients are both tempted by robo-only and robo-biased offerings, this suggests a clear strategic threat and one that advisers might like to think about sooner rather than later.

One way advisers can start to address this threat is by shifting their mix of services. Our survey found that while younger clients are more willing to adopt robo-advice, they also tended to value more holistic services, such as financial knowledge, good behaviours, goal setting and prioritising – services that are very difficult to automate.

Trust versus satisfaction

Every shopkeeper knows that trust and satisfaction are important to keep customers happy and coming back. An unexpected finding in the survey was that, for financial advisers, the relationship between trust and satisfaction is not linear.

For an adviser, the benefits of having clients who are both high-trust and high-satisfaction are exponential. Take the number of clients putting all their investible assets with one adviser. For clients scoring medium-trust and medium-satisfaction the figure is 21 per cent.

For those scoring high-trust and medium-satisfaction, it was 31 per cent. But for those with high-trust and high-satisfaction, it was 58 per cent. 

In other words, a shift from OK to great brought a three-fold likelihood in a client entrusting all their assets with their preferred adviser. In money, the difference was around £200,000. 

Given the importance of financial advice, we need to think not only about the extent and the cost of delivery, but also about the means of delivery and the quality of the advice.

Garrett Harbron is head of wealth planning at Vanguard Europe