Learning from the UK advice gap

Australia needs to be careful it does not sleepwalk itself into a pension crisis by creating an advice gap that is too difficult to close, according to financial services technology vendor Temenos.

Speaking to Money Management, Eric Mellor, Temenos wealth management specialist, APAC, who had spent most of his career in the UK, said a lot of the same problems were presenting in the Australian financial services industry as those in the UK following 2012’s Retail Distribution Review (RDR).

The RDR aimed to improve consumer outcomes from financial advice, resulting in the scrapping of many commission-based products.

“A lot of advisers elected to leave the industry,” he said.

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“Some of them were unable to move their businesses or to pivot their businesses to a fee-based model. And the ones that did, obviously from a margin perspective, decided to focus only on the high-net-worth customers, and it created a significant advice gap if you like at the bottom end of the market.”

Mellor said Australia was in a better position to close the advice gap compared to the UK because of its robust compulsory-contribution superannuation system and because there were more technology options on the market.

“I think a lot of wealth advisers were already trying to reduce costs by leveraging technology, looking to automate significant parts of the advisory process by using things like mobile applications and self-service channels to replace face-to-face contact.

“Things like chatbots, virtual assistants, remote co-browsing technology can help to guide customers. They can use things like automated risk tolerance questionnaires, goal-based planning tools, risk match model portfolios, and make use of low-cost underlying assets like ETFs.”

Although, according to Mellor, technology was not the silver bullet in closing the advice gap.

He said a lot of financial advice technology on the market kept costs low by putting the onus of taking action onto the client, which can result in worse outcomes for clients.

“What if their needs, which is often the case, exceed their available budget? How does an automated tool help a customer to prioritise where they shouldn't be spending their available cash each month?

“What if a customer’s number one priority should be paying down debt or, you know, taking out some sort of income protection insurance or even life insurance? If the tool is essentially centred around that investment vehicle, are those needs going to be met?

“How does an automated solution tell somebody that's really nervous not to sell their investment during a sustained period of extreme volatility?”

Mellor said work could be done to address a growing advice gap by entrenching financial literacy within the education system to stem poor financial decision making and reintroduce commissions on some products and services.

“If Australia was to look at a basic range, similar to the UK stakeholder pension that was introduced post-RDR to allow a small commission payment, that could go a long way.

“Theoretically, they could be recommended by less qualified advisers. And that benefits the industry as well because it provides a pathway into the industry for younger people.

“A lot of the companies that we speak to are reluctant to hire and train unqualified staff because obviously they can leave the firm right before the firm's able to recoup their investment in their training.

“But if you were to allow them to advise on less complex clients with less complex needs, using basic products, even if that commission was generated was fairly low - if it partially covered some of their training costs, then I think that would be a big win for the companies and for the industry itself.”