Ian McKenna: Where digital advice beats humans

This year’s flagship US adviser tech conference showed how digital financial advice can beat humans F&TRC director Ian McKenna

Ian-McKenna-in-2013-700.jpgNews from HM Treasury that the £1,500 retirement advice allowance can be applied to digital as well as traditional advice is important news for corporate advisers. Combine this with the clarity now provided by the new definition of advice and we have a landscape where it should be possible to design low cost services with greater regulatory certainty.

While I hear many traditional advisers questioning how they will struggle to provide such services for under £500, firms working digitally can deliver solutions for far less. Research by the Citizens Advice Bureau, responding to the FAMR, identified 5.4 million people in the UK willing to pay for advice but not at current prices. Looking at a range of other studies exploring what consumers are willing to pay for advice, the average figure comes out at around £100 per year. So that represents a £500m plus advice market waiting for organisations to service it.

It is increasingly recognised that the cost of acquiring customers is a serious challenge to the operational viability of direct-to-consumer automated advice services. Conversely, firms who already have large numbers of potential clients with relatively simple financial affairs are far better placed to meet this need.

This is why I believe workplace advisers, endorsed by the employer, should be in pole position to take advantage of the opportunity to provide low cost digital advice to the around 7 million consumers who have been auto enrolled into schemes in the last few years, who never previously had workplace savings or for that matter probably any other long term savings.

A few weeks ago I was in California for the Technology Tools for Today conference, which is also known as T3. This is the main annual adviser tech conference in the US. A wide range of research studies were examined during the event, several of which had messages very relevant to UK workplace pensions advice. In one study showcased at the event, 83 per cent of the US adviser firms responding said they now use video conferencing either internally or with clients.

Another study explored with consumers their preferences for receiving advice. Contrary to traditional thinking in the industry it showed that consumers actually prefer receiving financial advice remotely rather than face to face. A similar study in the UK has recently produced comparable results. While I’m sure many advisers will take issue with these findings, in the case of the American study, the process involved the use of biometric testing of the subjects’ reactions, ensuring the robustness of the results. For more on my coverage of T3 in the State click here.

A growing list of technology suppliers can offer solutions to help firms deliver automated advice. Intelliflo has been rolling out its service for some months now and Distribution Technology will launch its Access Advice service on 1st March.

MoneyHub presented its ability to support micro savings during its recent Finovate presentation in London, while fellow Finovate alumni Wealthify also now has an offering designed to help adviser firms in this area. That said, all the aforementioned currently focus on Isa or cash vehicles, whereas the pensions market is in reality a far larger opportunity and these suppliers should look to extend in these areas as soon as possible.

It is disappointing that not a single life office in the auto enrolment market has come up with anything like the technology solutions work advisers need to capitalise on this opportunity although I do expect this to change. LV= does have some automated advice services it wants to offer advisers, but advisers may question LV=’s lack of experience in the workplace market. It doesn’t have an auto enrolment proposition and has not offered workplace pensions via advisers for as long as I can remember.

While there are still some advisers saying there is no role for automation in advice, I’m speaking to many more who want to explore their options and find potential partners. There is no shortage of technology suppliers looking to deliver such solutions, but if the mainstream pension providers don’t start offering similar capability they could soon find themselves pushed out to the margins of the workplace pension market.

In the individual savings market post RDR we have seen financial planning become the core service advisers deliver rather than product or investment selection and sales. This has significantly eroded the relationship between advisers and product providers. Increasing numbers of firms, such as Lighthouse, Openwork and True Potential have been obtaining their own asset management permissions and establishing, or at least moving toward, their own platform arrangements.

For scale distribution firms this has made their technology suppliers increasingly more important partners than fund managers, platforms or life offices, which are being increasingly commoditised. The digital advice opportunity now presented will be the trigger for similar dilution of the role of pension providers if they do not fundamentally rethink the propositions they are offering.