Life insurers, banks, building societies and tech start-ups are all looking to target the yawning advice gap fuelled by the pension reforms, with some considering reintroducing advisers while others look to guided D2C or simplified advice offerings.
Such is the assessment of PwC director Steve Folkard, who has spent years working inside the pensions industry but is now consulting with an outside-in perspective.
“Be very aware that there are a number of firms of significant size that are looking to expand their D2C capacity because they don’t see a mechanism for accessing the individual consumer coming through the advisory channel, whether through individual or corporate advice,” says Folkard.
With a lengthy spell at Axa under his belt – where he rose to the position of head of pensions & savings policy – and experience working with Citizens Advice developing Pension Wise, Folkard is now providing advisory expertise to businesses looking to shape propositions to target the huge opportunity created by the pension freedom and choice reforms. His firm belief is that the massive demand for advice created by the complex options flowing from the reforms can be met only by a technology-driven simplified advice proposition.
Just Retirement recently launched a simplified retirement advice service and LV= recently tied up with Wealth Wizards for an online advice offering. Folkard says these are just the first of many organisations with propositions of the type that have been in discussion with the FCA’s Innovation Hub and are ready to go, as soon as the trailblazers test out the territory and the regulators clarify their direction of travel.
Folkard predicts revolutionary changes in the advice sector as a result of these new propositions and the new framework – changes that will test certain players while offering massive opportunities to others. New entrants to the advice sector – not necessarily existing financial services players – could seriously disrupt a market that has so far generally avoided the competitive pressure of technology.
“I expect the big banks will come to the market with some form of simplified advice proposition by the end of 2015 or early 2016,” he says. “But banks are unlikely to bring in their own advice products – they are more likely to go into partnerships with third parties.
“The cost of advice is going to come down as a result of technology-based simplified advice models. A simplified advice proposition can be delivered at £350 if it is technology-based, perhaps with telephone support. But anything other than simplified advice gets considerably more expensive.”
This, he argues, will create challenges for advisers. “There will always be cost-focused models that will be challenging for IFAs. Where advisers give good service, inertia will protect them, but where service is not good, these clients will be at risk.”
Big new brands
We could even see big advice brands appearing. The likes of Nutmeg are developing good brand recognition but have not achieved that all-important scale. However, a big player could come in, snap up a similar innovator and spend a lot on branding, he says.
“Why would providers not seek to advertise through broadcast advertising? General insurance aggregation sites like Moneysupermarket or Compare the Market spend 30 to 40 per cent of their turnover on advertising. Only those that spend on advertising will achieve the momentum to build scale. But that will come after the models have been tried and tested,” says Folkard.
Whether EBCs will win the battle for the long-term relationship with the new DC retiree remains to be seen, he says. “Some of the large consultancies are better placed than new entrants but the question is: have they got the capital to create a strong enough brand? They have lots of trust with employers but what they have never really done is leverage that through the workforce.”
So ripe for change is the advice market that Folkard sees parallels with the evolution of the general insurance market over the past couple of decades – parallels that no advisory firm can afford to ignore.
“When the first telephone-based GI service came in with Direct Line, all the brokers said people would rather come into their office than transact over the phone. And they carried on saying that for a reasonable amount of time before they realised they were losing business hand over fist.
“Then the first web-based propositions came along and they said people would not want to do their GI over the web. And then the aggregators came in and took over the space. And then we get to the situation where brokers have to present themselves through aggregators or they do not get enough business,” he says.
“With each of those stages, the resistance was from the vast majority of the people in the industry. Each time you get one of these big changes, it is not because everyone in the industry thinks it ought to happen. It’s because a very small number of entrepreneurs decide to create a model that challenges the status quo, and gradually it takes hold and everyone has to fall in behind it. And why? Because it delivers a better service to the customer,” he says.
Folkard argues that the life and pensions market has been able to avoid change for a long time because of the complexity inherent in pensions.
“You really needed someone to take you through all the complex solutions,” he says. “You have a big part of the industry that says ‘This is hugely complex’, which for some people with lots of different benefit solutions and large pots and
complex scenarios is true. But for the average customer, it is a choice between cash and income and a guarantee, and when they take it. And that doesn’t have to be so complicated,” he says.
“Once people automate that business model and deliver it more cheaply, I genuinely believe we will look back and think: ‘Who said we could never deliver full advice in under two hours for under £400?’ We will get there because technology will make it happen,” he says.
Those targeting high-net-worth individuals are unlikely to be threatened but some clients at the margins of being able to afford to pay for advice could be lost to new models, he argues. “The driver for these new business models is not the high-net-worth clients but a focus on those who don’t traditionally pay for advice,” he says.
Advisers, not surprisingly, have been very negative about the safety of non-advised or simplified advice products, particularly for the increasingly complex retirement choices now available. How can you present someone at 65 with a drawdown investment solution to take them through to their 90s without making recommendations that stray into advice?
Folkard says: “My view is that, if you default someone into an option, you have to present the alternatives to that option as well as the default. In a way, it is no different from the risk warnings you have to put around someone defaulting into an annuity.
“So if you look at a retirement wake-up pack, and setting aside the fact that they need improvement, these packs are designed to help people understand the other options they have, aside from buying an annuity with the home provider.
“Equally, if you are in ill health or have circumstances where you don’t have a partner, there are risks with going for an annuity. Or if you have a guaranteed annuity rate, you have a risk that you could be worse off going for drawdown. The risk warnings need to be delivered in such a way that they help the customer to understand and make a decision.”
So how can organisations that offer these automated or semi-automated services insure themselves against redress when, as is inevitable, at least some users end up on the wrong end of financial markets?
“All these models depend on how you are getting their consumer to assess their options before proceeding. So if you are undertaking a full advice process, you will assess attitude to risk and capacity for loss. And if that shows a cautious attitude then an equity approach isn’t really on the table. And drawdown will normally fall away as an option at that time because they don’t have the appetite for risk that means they can invest in assets that can give them the possibility of an income that could exceed an annuity,” Folkard says.
But simply inserting risk warnings into a website is not the end of the story, he says. “It is easy to create a website that puts out lots of risk warnings and says do not proceed unless you are a sophisticated investor. But the challenge comes when someone who isn’t sophisticated says that they are and goes through anyway. Then you have got to pick them up through risk warnings that say ‘Have you considered X and Y?’ And those risk warnings need to be really extensive. It can be done but it is not easy.”
Folkard speaks from the experience of having mapped the flows that lead to the multiple outcomes people could choose under the new reforms.
“Every single one of the transaction routes has a slightly different requirement in terms of the duty of care that the person providing the service has, from very high at full advice to lesser but different requirements at execution only. If people get the wrong side of a line in these models, so they think they are operating model A but in fact are straying into model B, then significant problems can arise,” he says.
Folkard sees no reason why, in future, pension ATM cards could not become a reality, bringing the Chancellor’s promise of a pension like a bank account closer to reality – if there is consumer demand for them.
“Most systems are set up to deal with simpler, larger transactions and are not even set up to deal with flexible drawdown and multiple lump sums in some cases. So because providers do not have the flexibility built into banking systems, no one in the pensions industry can see how you could have that flexibility. But the payments technology exists – it’s just that the insurance industry doesn’t use it,” he says.
“So if you take these sorts of concept and ask who is best placed to capitalise on them for the mass market, it is not the insurers, it is the banks – because they already have the technology in place for dealing with the customer.
“Whether the customer will want to use it is another thing altogether,” he adds.
If Folkard is proved right, the financial advisory sector could look very different within a couple of years. Technology has always driven cost efficiencies and service standards – with so many interested parties pouring resources into the new at-retirement opportunity, some powerful, innovative propositions are sure to emerge.
ABOUT STEVE FOLKARD
May 2014 to date – Director, PwC
2011-14 – Director, PA Consulting Group
1987-2011 – Head of pensions & savings policy, and other roles, Axa
Interests – Archaeology, rugby union and motorcycle touring