Mind the Gap

The United Kingdom has an advice problem, and it should serve as a warning to Australia.

A survey conducted in 2021 by Open Money, an online provider of financial advice and money management tools, suggested the number of people who had paid for advice in the UK was just one in 14 – down from one in 10 in the previous year. It noted, however, that of those who had paid for advice, 90% found it helpful and valuable.

NEGLECTED CUSTOMER SECMENTS 

Advisers felt that the ‘floor’ – the minimum sum of investable assets needed to bring on a new client, ranges around £48,000, or approximately $87,000. In fact, 20% of the respondents suggested the figure could even be as high as £100,000 ($180,000).

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An evaluation into the impact of the Retail Distribution Review (RDR) and financial advice market by the UK regulator, the Financial Conduct Authority (FCA), determined that customers with investable assets of just £10,000 ($18,000) would benefit from some form of professional financial advice. Still, this segment of consumers continues to be neglected by the industry.

In fact, the RDR is generally considered to be the trigger event that led to this advice gap.

The removal of commission-based products saw many financial advisers, both independent and tied agents, exit the industry or downsize and switch to a fee-based model.

Skyrocketing prices caused by higher education standards and tighter regulations drove those who remained in the industry towards the wealthier end of the market, increasing competition for a smaller customer segment and leaving many people unadvised.

Direct parallels can be drawn with the current state of the Australian market following the Hayne Royal Commission.

FOCUS ON PENSION CONTRIBUTIONS

Obviously, pension planning is just one of many financial areas that a customer may seek advice, but in considering a looming advice gap, this is the area in which the UK elected to focus.

To combat some of the challenges, they introduced a mandatory low-cost pension product, one of which advisers could earn a small commission. Despite some encouraging early adoption, actual contribution rates are considered inadequate by most.

A 2021 study by Standard Life found that 10% of those aged 55-64 felt they would have sufficient income to last five years, and 25% felt their savings would last for only 10 years. 

Even if it seemed like Australia is able to rely on superannuation to avoid a similar issue, the Mercer Global Pensions Index, which measures the integrity, adequacy and sustainability of a developed nation’s pension systems, has already seen Australia drop to sixth place in 2021, from fourth in 2020.

Some of this fall can be attributed to changes in policy, but a measurable increase in household debt has also led to a reduction. 

The Open Money survey mentioned previously further highlighted a worrying emerging trend – that almost one in 10 younger people, those aged 18-24, were more likely to turn to social media platforms such as TikTok and Instagram for advice than to seek help from a professional adviser.  

The ‘financial advice’ available on these platforms feels somewhat inadequate to deliver a well-rounded personal finance education.

DIGITAL IS NOT THE SILVER BULLET

So what are some options available to the Australian industry to avoid following in the UK’s footsteps?

To fully understand the problem and to consider suitable solutions, we must first acknowledge that one touted solutions may not be a solution at all?

Technology-enabled business will help advisory firms to reduce operating costs. The savviest will enable ‘digital only’ offerings that can serve basic solutions to retail customers at low cost, but they may be a far cry from the much-needed, gap-closing silver bullet. 

Australia has recently seen a raft of new market entrants with varying flavours of digital advice. The common themes are high levels of technology enablement, fully automated end-to-end execution, digital channel delivery of relatively basic advice and placing the onus upon the client to implement any recommendations that are made.

While some of the solutions will consider and make recommendations in areas such as debt restructuring, cash-based savings and, for some, insurance needs, most are focused on client education only and are built around a robo-advisory type solution.

Obviously, a ‘robo adviser’ is not an adviser at all. We are yet to encounter one that will advise you to buy some life insurance, stay in cash and call your mum more often.

LIMITS OF ROBO-ADVISORY

Robo-advisers are simply automated portfolio management systems that enable more efficient, and therefore cheaper investment management operations.

Some may be linked to goal-based planning tools and many will incorporate risk tolerance questionnaires, thereby creating a perception of ‘advice’. 

For most, the output, regardless of input, is a recommendation to buy an investment portfolio, falling a long way short of the ability to provide true ‘holistic’ advice.

When adviser remuneration was linked only (or primarily) to product sales, the outcome of a meeting with an adviser may often have been the same. The perception was, and remains, that only by paying a fee will consumers receive real holistic advice that is not influenced by the need to sell.

Whilst portfolios of low-cost exchange traded funds (ETFs) can be bought on a mobile device with a small lump sum or a minimal monthly contribution, what these solutions cannot do is control and balance emotions.

A robo-solution will not tell an investor to hold a falling position or provide a long-term economic outlook. It may not encourage a customer to take advantage of a market dip nor to lock in a gain. On the plus side, it may also not expose clients to unnecessary switching fees or high annual management charges, but it will do very little to educate and enforce discipline.

While technology has made it easy for customers to buy financial assets at the push of a button, has it also made it too easy? Has the removal of the gatekeepers also removed the protection? 

And this is where the real challenge begins. KPMG now estimates the cost of providing truly holistic advice in Australia could be as high as $5,335, significantly higher than the Netflix style ‘subscription’ models being offered by several digital advice providers.

The requirement to produce a full statement of advice for almost every recommendation means that advisers can no longer answer simple questions such as those related to a fund switch without fear of falling foul of the regulator.

BARRIERS TO FINANCIAL ADVICE

Clearly, for individuals with only small sums in investible assets, the fees are likely to be very difficult to justify.

Explicit fees, those not linked to commission payments, have always been a challenge for the wealth management and financial advisory industry. Most of the products and services are intangible at the point of sale. 

The true value of an insurance product may only be recognised if an insurable event occurs and the benefit of a well-diversified portfolio may only be known during a market downturn 

To convince the most inexperienced consumers or those with lower levels of investible assets that any feel level could represent value, they must first be convinced of where the value may lie and then overcome some historical challenges related to trust.

The number of casual workers in Australia in 2019 was almost 25% of the total employed workforce. During the onset of the COVID-19 pandemic, many of these workers, especially those employed in retail and hospitality, were unemployed and with limited access to benefits. This single event shone a light on how unprepared many younger, lower-income earners are for unexpected events.

These consumers may not require detailed portfolio recommendations, tax planning, estate planning or other highly specialised services that would require a significant investible sum or a hefty initial fee – but they clearly need, and may continue to need access to financial education, cash management, debt structuring mortgage advice and advice on life, income and health insurance.

By using investible assets as a selection tool for access to an adviser and robo or other digital solutions as the only viable alternative, it is easy to see that many Australians will not gain access to advice in many other important areas.

CLOSING THE ADVICE GAP

So what actions could now be taken to help stave off the growing gap before the problem becomes too big to manage?

There have been several calls from key industry participants that the reintroduction of commissions on some products may now be justified. Providing the underlying products are not complex, a defined sales process is in place and the products remain competitive from a cost perspective, a move such as this would be better than nothing. 

Given the perceived victory for some very vocal consumer groups, this seems very unlikely to occur.

What is required is a clearer and perhaps less onerous boundary between ‘advice’ and ‘guidance and education’. Many financial professionals are willing to spend time with less affluent customers, some on an entirely pro bono basis, to help provide education. 

A clearer definition that provides advisers with the confidence and freedom to offer limited guidance and education without the need to conduct a full review or produce a full, detailed statement of advice would likely be welcomed by all. 

Another recommendation would be for an advice sub-segment limited to the basic products and services – an ‘advice-lite’ model.

Product manufacturers would be incentivised to launch low-cost products with capped fees and basic options. Driven by access to the larger volume retail segment, adviser firms can leverage technology to aid in the most cost-efficient distribution methods.

More streamlined and less onerous regulatory requirements could support the provision of limited advice. Reducing the educational and qualification requirements for advisers who service this segment would also benefit the industry.

Many advisers have exited the industry and firms are faced with a difficult choice – spend large sums of money recruiting and retaining experienced and qualified professionals or spending time to recruit, train, coach and develop unqualified or less qualified new industry entrants.  

Due to the risk that these new entrants could subsequently move to another organisation, the commitment to training is a significant undertaking and financial risk. Allowing new entrants to service less-sophisticated clients with basic needs could partially subsidise this investment as the advisers develop.

Financial education needs to be woven into the fabric of Australian education. All consumers should have access to a basic education that highlights the benefits and importance of quality financial planning. If the Government can work with the industry, it is possible the worst impacts of a looming crisis could still be averted.  

Eric Mellor is wealth management specialist, APAC, at Temenos.