Making advice affordable

US mass market technology-based advice models have much to teach us says Ian McKenna, director, F&TRC

ian McKenna, F&TRC

The entirely predictable torpedoing of consultancy charging by the DWP leaves the workplace pensions community in urgent need of a vehicle to make advice economically viable. Early experiences of adviser charging in the individual market demonstrating that, even for high net worth customers, the time spent on the paperwork itself becomes a major expense. It therefore looks unlikely adviser charging will be practical as a vehicle for providing individual advice to scheme members.

The UK corporate advice market clearly needs to become more creative in the way it delivers support to savers. A recent trip to California to attend the Finovate Spring conference provided a wealth of insight into how this may be achieved.

Spending an increasing amount of my time outside the UK it is becoming increasingly apparent to me that RDR and auto enrolment have relegated the UK to virtually third world status when it comes to advice innovation.

At Finovate and in other meetings on my trip I met a range of organisations who are putting in place advice propositions that are economic even for those of modest means. In this column I explore just a couple. Interestingly these are increasingly being created by Registered Investment Advisors, which are the American equivalent of IFA firms. A common objective amongst such organisations is to deliver advice to the masses at no more than 10 to 20 per cent of the cost of the more traditional services that would be offered to high net worth consumers.

Flexscore has launched a benchmarking system designed to help consumers understand the behaviour that can help them succeed financially. This works by taking the user through a series of fact find type questions which will produce a score which indicates the users fiscal health. From this the system generates a score card based around 14 unique financial categories. By acting on the recommendations, which cover a wide range issues to help with monetary wellbeing, users can improve their score. The service is free to end users and the revenue model is based around the generation of third party services. A version of the system designed to be used by other advisers with their clients is currently in development and is expected to be available in the US later this year.

Nestwise offers a range of planning services, starting with a free online service which includes online financial assessment and access to an e-mail help service. This can be supplemented with a three month service for $39.95 which includes a budget builder, smart spending tools, guidance on how to save and preparation for how to invest once users are seeing the benefits of better budgetary control. This service can be continued after the initial three months for $9.95 per month.

A third option involving an initial $250 advice fee and an on-going annual cost of $575 allows the creation of a comprehensive financial plan, pension recommendations centralised investment portfolios and on-going financial and investment advice including a quarterly meeting with an advisor, a full annual review of their financial plan and on-going advice on call as necessary during the year.

Both Nestwise and Flexscore put technology at the heart of their processes but also make extensive use of behavioural finance in their propositions, seeking not just to enable consumers to make better investments but also to help them with managing the day-to-day aspects of their financial lives.

The lack of attention to affordability is an area where auto enrolment is deeply flawed. If you sell someone a pension they can’t afford, and auto enrolling someone is selling, all we are really doing is selling an investment that will receive contributions perhaps for a matter of months but incur operating costs for many years.

By comparison if you help someone better manage their day-to-day finances you not only protect their ability to make on-going contributions but also create a good potential customer for other services in the future.

By definition there are reasons why those who are now being auto enrolled have not made private pension provision previously. In many cases it will be because they felt they could not afford to. For auto enrolment to truly succeed we need to be sure that the contributions are sustainable and affordable. To achieve this I believe we need to start delivering new forms of affordable financial education in a similar style to those outlined above.

Politicians and the consumer lobby are obsessed with driving down the cost of savings products and removing traditional ways to charge for advice. This creates a challenge to find innovative new ways to deliver our services. Elsewhere in the world this is being achieved – we should learn from them.