We may not be able to physically travel to other parts of the world at the moment, but we can still learn from colleagues located in offshore markets.
This year, BT conducted its UK study tour virtually, with Australian financial advisers able to connect online with colleagues to learn about what’s happening in the UK.
It may come as a surprise for some that, despite being on opposite sides of the world, there is a high degree of similarity between the two markets.
The advice gap, impact of regulation, intergenerational transfer of wealth and the role of new technologies were just some of the main themes explored and this article unpacks some of the ideas and themes addressed.
An advice gap is the inability for some people to access financial advice. It happens when demand for financial advice from consumers grows, without a commensurate increase in the industry’s capacity to meet this demand.
Like in Australia, a tightening of regulations in the UK is a key reason for the advice gap. In the UK, a regulatory regime called the Retail Distribution Review (RDR), which is similar to our Future of Financial Advice (FoFA), was introduced in 2012 to tighten industry standards. Like FoFA, RDR meant a shift for the industry from commission-based payments to a fee-for-service model. It also required advisers to have higher qualification standards, similar to Australia’s Financial Adviser Standards and Ethics Authority (FASEA) exam.
While this has helped to increase professionalism among UK financial advisers, it has also led to a shake-out of the market. This mirrors a similar situation in Australia when FoFA was launched, with many advisers choosing to leave the market rather than complete qualifications and introduce new systems in the business to meet compliance standards.
An unintended consequence of the RDR was banks exiting financial planning quite fast which resulted in an advice gap.
In both the UK and Australia, the introduction of new regulations also added to the cost of advice, which compounded the advice gap. In the local market, the Financial
Planning Association’s (FPA’s) data indicates the average cost to establish a financial plan is $3,300, with annual costs of $4,300. The high cost of advice prevents some investors, especially younger ones, from seeing a financial adviser.
Maintaining relationships with younger clients is an issue that needs to be addressed in both the local and UK markets, given the huge amount of wealth that will change hands from baby boomers to Generations X and Y in coming years.
In the UK, low awareness about the benefits of, and need for advice, as well as the lack of a strong culture of savings and investments, are also contributing to the advice gap.
Additionally, many financial advisers are targeting high net worth individuals, making it hard for consumers to find a financial adviser if they do not have a decent amount of savings. This is also true in the Australian market.
BRIDGING THE ADVICE GAP
Moves are afoot in both markets, however, to address the advice gap. Structural changes in the UK are part of this. In the UK, most platforms are owned by life insurance companies. But banks are now starting to re-enter the wealth management market, which may help provide consumers with access to affordable financial advice. It’s worth noting this cycle is quite different in Australia, with banks routinely exiting the advice business in recent years.
A large proportion of the retail banking population was underserved for a long time; however, in recent years banks have started to re-enter the advice market in a more aggressive fashion.
In the UK, commonly there is a separation of the investment bank and retail bank when they are part of the same entity. This split means many retail banks are sitting on significant balance sheets they cannot lend to the market, leading them to explore other options to drive revenue. HSBC UK has around £60 billion ($111.9 billion) of assets under management to invest on its balance sheet and some of these funds can be put to use to develop its advice practice.
Competitive pressures in the UK are also prompting retail banks to enter the advice space. Banks recognise they are more likely to be able to retain a customer’s business if they are both a retail and wealth management client.
CHANGING ADVICE MODELS
A shift in the way advice is delivered is helping to democratise access to advice and address the advice gap locally and in the UK. But more needs to be done to encourage young people to receive financial advice.
To this end, in Australia the Financial Services Council (FSC) has launched a green paper to explore options to simplify the financial advice industry. The Personal Investment Management and Financial Advice Association (PIMFA) is undertaking a similar program of work in the UK.
More options for consumers to access digitally-provided, regulated financial advice will also help bridge the advice gap and new technologies are emerging to help service consumers en masse. For instance, HSBC’s UK financial advice clients can use chat functionality on its website to talk to an adviser. Robo-advice models will also help, as will hybrid advice models that combine elements of robo-advice with some face-to-face communication between advisers and clients.
Direct-to-consumer financial platforms are also becoming popular in the UK. These portals broaden options for consumers, especially those with smaller balances and simple requirements. Consumers are able to directly invest in financial products such as managed funds and exchange traded funds (ETFs) through direct-to-consumer portals.
At UK advice practice First Wealth, the emphasis is now on ‘life centred planning’. Other UK practices have moved towards ‘life centred planning’ where previously the conversations with clients focused on investments and their performance but had now shifted more towards the client’s goals, objectives and responsibilities, as well as how advisers can help them prepare with upcoming life transitions.
While it’s encouraging to see new approaches to the way advice is delivered, a commensurate change needs to occur at the regulatory level to support consumers to access financial advice throughout their life and as their circumstances change.
The chief executive of PIMFA, Liz Field, has noted there is an opportunity for regulations to allow for a more fluid approach to encourage consumers to seek advice. For instance, consumers should be able to access simple, digital advice initially and also seek more complex advice through a face-to-face meeting with a financial adviser, and then move back to digital advice at a later stage.
It’s also essential to make the industry more appealing to young advisers to build up the talent pool.
Access to ongoing professional development is part of this and some institutions are founding learning institutes to give advisers ongoing opportunities to expand their skills.
As this shows, there is no magic bullet when it comes to addressing the advice gap. Actions need to be taken on multiple levels to ensure consumers can access cost-competitive financial advice when they need it through different life stages.
THE TECHNOLOGY REVOLUTION IN ADVICE
Having adapted their business models to comply with new regulations such as the RDR, UK advice practices are now better positioned to take advantage of emerging technologies.
Open banking, which was introduced in the UK in 2016, is one important initiative that will drive changes in financial advice. The regime gives consumers more control over their financial data and is intended to drive competition in financial services, in particular by supporting fintechs and other businesses to offer more innovative products to consumers.
Using scale to drive efficiencies and conduct acquisitions was also a major discussion point and scale enabled a better capacity to invest in an ever-faster spinning wheel of innovation. Cultural fit is also essential to successfully integrate an acquisition.
There are more commonalities between the UK and Australian financial advice markets than many advisers may have first thought. Professionals across both countries have much to learn from the different dynamics playing out in both nations now and into the future.
Chris Mather is head of distribution at BT.