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Why 20% of investment advice will be automated by 2020 (plus or minus 10%)

Ben GossPublished: 15 March 2017

I was asked last week to speak at the Personal Finance Society Leadership Forum on the topic of automation in advice. I started with the following questions:

 


Q: How many IFAs are there in the UK today?

A: Say 25,000 depending on how you count them

Q: How many clients does an average adviser actively service in any one year?

A: Say 100-200 depending on business model (and for every one that is actively serviced, often there is one that is not)

So we can surmise that 2.5m to 5m people receive advice each year, with a similar number of customers who are on IFAs' books but not actively serviced.

Q: In 3 years’ time, will fewer or greater than 10% of this number of people (i.e. 250-500,000) receive advice which is automated?

A: We had a good discussion under Chatham House rules!

My argument is set out below though. Nobody would argue that automation is not coming, the question is; ‘how quickly?’

My number is north of 10% and probably south of 20%. Why? Not because clients will demand it, but because of cost to serve:

  1. IFA client bases have been getting older and wealthier. This is fine if you have a truly HNW client base, or you are going to sell your business in the next few years but for those that don't and want to run their business and build value beyond that i.e. most firms, replenishing clients is critical.
  2. Capturing clients earlier in their wealth accumulation journey, when they have more modest savings is painful and unprofitable (for both adviser and client!) as manual advice processes take too long and cost too much at this level. However advice-seeking consumers (80%+ of the population?) who are not confident enough to be self-directed, won’t take action without getting advice from an adviser or firm they trust.
  3. Over the last 5 years there has been a shift in customer service expectations as digital has exploded. As this accelerates it will drive even greater focus on fees. The focus on fees is a driver behind the growth in passives as advisers look to manage total costs for clients.
  4. Post FAMR through Project Innovate and the Advice Unit the FCA is encouraging automation in the delivery of advice. Innovation is the Regulator's number 1 objective in it's business plan for the sector. In addition, if, as expected, a new definition of advice is adopted in line with MiFID which requires a personal recommendation; the market will be flooded with digital d2c, risk based guidance; ‘advice lite’, from big brands, with big budgets. This will increase the demand for digital services but also compete for simpler cases.
  5. Effective risk based investment management is now the key factor in winning investor trust. The risk / return trade-off is the primary determinant of investment selection. Not an afterthought. The huge growth in outcome and allocation funds since the Financial Crisis is testament to this.

In summary, operating a manual investment advice business in a digital world is challenging enough today, let alone in 3 years’ time.

Advice firms have to find ways to replenish their client bases with a radically lower cost to serve and at some point, compete against bigger brands who will come back into the market with digital guidance. Simpler, smaller value cases (10-20% of an adviser's active case load today) are ideal for lower cost, multi asset, risk focused investment solutions. They are the ‘low hanging fruit’ for automation. If you take a similar approach to clients who are not actively serviced at all but could be through a low cost route you double your addressable market.

If you would like to see how Dynamic Planner can help you replenish your own client base and automate your advice for ISA clients at low cost, take a look at AccessAdvice here. It can turn what are often painful processes into profitable ones!

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