The future of advice

In the first of a three-part feature, David Tiller, Head of UK Propositions at Standard Life, considers the future of the advice market: what’s driving increased demand and competition, and the advice models of the future.

The adviser marketplace is going through a historic transformation. Demand for advice has never been greater, fuelled by several deeply-rooted trends. That means there are huge opportunities for those who can grasp it – not only advisers but also other businesses.

Here I look at what’s driving these changes both in terms of demand and competition, and the advisory models that are likely to emerge.

The formidable drivers of demand and competition

As we’re all aware, the demands of clients have increased and changed over recent years. Statistics on the ageing population and increasing life expectancy signal a huge segment of the population who’ll need to fund a longer retirement. Many of these won’t have any defined benefit (DB) provision, and the amount they’ll get from any State pension looks increasingly under threat.

And while pension freedoms have given clients more choices, it also brings significant complexities and risks for them to navigate.

This comes together into three major trends which I see driving demand for advice and supporting the new competition coming into the market.

  1. Market returns: guarantees aren’t affordable. In the past, clients were able to invest with a certain level of guarantee and then ‘forget about it’. But in our current low-inflation, low-return environment, there are few affordable guarantees. This means clients are looking for help in facing the complex challenge of funding their retirement.
  2. Regulation driving fee-based service and supporting new competition. Regulation has stamped out traditional sales practices and demanded transparency on fees, meaning the commission culture is a thing of the past. As a result, the market has moved away from selling products to providing long-term advice and service.
    Promoting effective competition for the benefit of consumers is also a core objective for the FCA. And as a result of several regulatory initiatives, including the Asset Management Study, the Investment Platforms Market Study and the Financial Advice Market Review, we’re seeing greater price competition.
  3. Technology is changing everything. We all expect greater interaction with the services we use – including how we invest. It’s transforming every aspect of advisers’ businesses, by automating and combining activities and services. And crucially, it’s how advisers can deliver an individual and tailored service to clients in a scalable way. It also means that some of the services which were previously restricted to the very wealthy become more accessible to everyone.

These three drivers are here to stay. Regulators aren’t likely to step back from looking after consumers’ interests, and increased transparency and disclosures. Technology is only going to continue advancing. And while it’s impossible to predict the future performance of markets, the low-growth, low-inflation environment is predicted to continue.

Understanding the new competition

New competition is coming from businesses which understand they need to be involved in the advice process to diversify their sources of income. In some cases that’s through partnership with advice businesses, in other cases it’s by owning the advice process itself.

  • DFMs and wealth managers: investment-only fees are falling and they’re losing out to full-service advisers who are benefiting from the increased need for pension planning.
  • High street banks: since the financial crisis, they’ve faced increased regulation and legislation that has encouraged competition in the banking sector, such as open banking.
  • Investment houses: institutional clients are disappearing along with DB pension schemes. So they’re having to move their focus to how they can support retail customers.
  • Platforms/Life companies: many of these are struggling to modernise their business models and achieve scale at a sustainable fee level.
  • Private equity: these businesses aren’t under as much pressure as some others. But they are attracted by the significant assets that are now available in the advice market.

These businesses can all see the opportunities the advice market offers. And some will be entering the market with little baggage or legacy systems, bringing their best ideas around digitisation and automation.

Adviser businesses need to acknowledge the market will evolve, and fully leverage the existing strengths they have in their deep client understanding and evolved propositions.

The advisory models of the future

I believe three high-level models are likely to emerge: robo advice, remote advice and digitally enhanced advice.

The most simple robo model is likely to have a relatively small audience, but remote advice could potentially have a huge audience. So to survive, adviser businesses will need to position themselves in line with their chosen customer segments, normally between the remote and digitally enhanced models.

Advances in automation mean adviser businesses will have to manage the conflict of demonstrating value, while retaining competitive fees that can stand up to scrutiny alongside pure robo models. This will involve embracing the digital technology that robo uses to make their operational processes just as efficient, if not more so. At the same time, however, it's equally important to clearly articulate to their clients the value-added service they get through personal advice.

So it’s about retaining the service they already provide that genuinely adds value, and taking advantage of new technology in the areas where it isn’t. For example, if a client isn’t going to pay an adviser for doing something manually, then automate. By continuing with manual processes where customers can’t perceive value, advisers are effectively disadvantaging themselves against simple robo models.

The good news is that advisers aren’t alone during this challenging transition period. In part 2, I look at the developments in investments and platforms that can help advisers offer their clients compelling and individual solutions.

The views expressed in this article are those of the author and not Standard Life Aberdeen. Standard Life Aberdeen accepts no responsibility for advice that may be formulated on the basis of this information.

 

David Tiller, Head of UK Propositions at Standard Life

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