Only one in 14 people, or 7% of the United Kingdom population, paid for financial advice in the two years to 2021, according to recent Open Money research.
Yet many of us – especially younger generations – are desperate for assistance with money management. Particularly now, in 2023, with the post-pandemic cost-of-living crisis biting and the threat of a global economic crisis.
Royal London estimates that 39 million UK adults – of roughly 52 million in total – have fallen into the so-called “advice gap”, meaning approximately 75% don’t take any form of professional advice or guidance regarding their finances.
Receiving sound financial advice benefits individuals and society. It will tackle intergenerational poverty, reduce underinsurance and ensure retirees are financially comfortable. Engaging and planning with a financial adviser empowers people to feel more confident and in control of their money. Fundamentally, it allows them to better prepare for the future, whatever happens.
In the UK in 2023, financial advisory and wealth management services remain heavily skewed towards High-Net-Worth and Ultra-High-Net-Worth people. As a result, the average person – the “mass retail” customer – remains critically underserved, despite representing more than half of the population and having the most to gain from regulated professional financial advice.
An International Longevity Centre UK report published in late 2019 showed that someone “just getting by” boosted their pension wealth by 24% over five years thanks to financial advice, while for “affluent” people it was 11%. Overall, if more people are smarter with their investments and debt, their families, friends, and the economy will benefit.
Innovating to bridge the gap
Conversely, there are far-reaching consequences to so many people lacking help with financial security. Alongside the people and families that suffer financial trouble or fail to plan and budget well, the financial services industry and the taxpayer will be impacted by under-insurance, low pension contributions, and a lack of emergency funds.
Alarmingly, a Financial Capability Survey from 2018 indicated 39% of adults didn’t feel confident managing their money, while 11.5 million had less than £100 in savings. And that was before the coronavirus crisis.
Intelliflo’s 2022 Advisory Business Impact poll found that 73% of advisers surveyed believed the advice gap had grown in the previous five years. Almost two-thirds (62%) said it had widened even more during the pandemic.
Clearly, the fact that a vast majority of UK adults don’t receive financial advice is a huge – and, in the current economic climate, a growing – problem for everyone. However, there is a significant commercial opportunity for financial services operators bold and progressive enough to innovate and close that gap.
By innovating in five areas – outlined below – accessible solutions are within reach. Moreover, the innovations required to develop a hybrid advice offering – part human, part data-hungry artificial intelligence – will benefit all customers. Therefore, it’s worth factoring this into roadmap thinking, even where serving the mass market is not part of the short-term strategy.
Indeed, Royal London calculates there is £185 billion to be unlocked, with that amount of liquid assets sitting uninvested in the accounts of unadvised people with over £50,000. Additionally, 5.7 million non-advised customers have investible assets up to £50,000 and are interested in receiving financial advice.
Further, some currently believe that they don’t require advice but could potentially be attracted by the right kind of service. At a conservative estimate, these customers represent over £2 billion in untapped revenue.
An opportunity with short- and long-term benefits, but the commercial opportunity to narrow the advice gap goes beyond focusing on assets under management (AUM). It is also an opportunity to engage the next generations.
Consider those at the lower end of the age scale. By 2025, Gen Z will make up 27% of the workforce in OECD countries and one-third of the world’s population, according to World Economic Forum projections. Members of this cohort – born in the late 90s to early 2010s – are starting their careers during a period of rising inflation, student debt, housing crises and a looming recession.
Currently, the under 25s are more likely to turn to social media for financial advice than a professional adviser, according to Open Money. Some 9% of survey respondents aged 18 to 24 revealed they use social media such as TikTok and Instagram for financial advice.
There is, then, a unique opportunity for financial service operators to engage a disenfranchised segment of the population by building trust through the provision of financial advice and tools that suit the behaviors – and on the preferred channels of tomorrow’s leaders.
Taking a long-term view that there is “wealth in waiting” means it is the perfect moment to develop and offer a personalized, hybrid solution. And one that leverages open banking and the demand younger generations – who will reach their earning potential in a cashless and probably cardless world – have for help with money management.
Now is the time for wealth and advice providers to take the lead on innovation to address the limitations in their control. There is no downside. The changes required to address the advice gap are the same changes the sector must make, regardless of the target segment.
Overcoming barriers to progress
There are various reasons why the advice gap exists and is widening, and it’s helpful to identify these impediments to overcome them. Some are easier to address than others.
First, the dominant industry business model for financial advice is not oriented towards the mass market. Wealth managers and advisors traditionally charge their clients an annual percentage of AUM starting at around 1%, which can be a lucrative cut when applied to the substantial assets of the wealthy.
Revenues become much less attractive lower down the investable assets scale. Royal London research suggested that prospective customers required around £50,000 before many advice firms would even consider taking them on.
The problems inherent in this business model have been compounded by an increasing regulatory burden, which further squeezes margins on less affluent clients by making the work of advice more resource intensive.
While the Financial Conduct Authority – which coined the term “advice gap” in a 2014 report – has worked hard to improve the standards of the advice market, the unintended consequence has often been an increasing cost of compliance. This compliance has inevitably driven up the cost of service, hitting clients at the lower end of the AUM spectrum hardest.
Other structural causes of the advice gap exist in the attitudes of customers themselves. A generational lack of trust in financial services and low financial literacy has reinforced the gulf between advice providers and would-be consumers, leaving individuals unable to understand or envisage the potential value of financial advice and, therefore, not seeking it out.
Alongside model inflexibility, customer reticence, and regulatory concerns and costs, technology inertia is a final barrier to progress in this area. This lack of progress is partly driven by a typically archaic approach by those in the sector. Up to now, we have seen more research than innovation.
Ultimately, though, innovators will triumph. Hybrid advice solutions are inevitable, and pioneers are likely to realize this substantial commercial opportunity.
Five innovation steps to build a hybrid-advice solution
1. Revenue model flexibility
Advice providers need a business model that can absorb different costs for different customer types, whether segmented by assets held or service required. Consider alternatives and supplements to the standard asset-based advice model – for example, by blending “assets held” and “services required” models. Boost accessibility by reducing investment minimums to the lowest possible point. A tiered-subscription pricing model seems sensible since this reduces entry requirements for retail clients while leaving room for premium relationship management for high-end clients. Offering all customers access to all services at a transparent and universal price point will also help dispel some of the perceptions of elitism and inaccessibility surrounding the industry.
2. Brand positioning
Consider how to engage with younger and more diverse audiences by addressing modern concerns. Increasingly, ethics and values are more relevant trust metrics than heritage and prestige. A customer-centric approach focusing on simplicity, inclusiveness and empowerment in branding and engagement channels will go a long way. Providers can accelerate progress through partnerships with organizations that already hold an engaged customer base – for example, banks and retailers – to leverage the trust in those brands. Banks, however, are in a prime position here; the existing relationship with the current account holder should be the perfect bridge to a financial-advice journey.
3. Data maturity
With strategic vision and customer acquisition plans aligned, the next focus should be on data, which will be the differentiator that will allow wealth and advice services to move beyond current constraints. Implementing the core capabilities to harness, manage and store exploit data is vital. By sourcing quality data and converting it into personalised insights, providers will have all the raw ingredients to offer nuanced advice and guidance based on an individual’s complete financial profile. Open banking and open finance data will be critical here.
4. Hybrid advice model
With algorithms handling most of the heavy lifting, data will pave the way for the scalability and lower cost base needed to break into the mass market. To be truly scalable, though, a wealth and advice proposition must be modular, offering a mixture of services across a spectrum of automated-digital to manual-human. For example, at the entry-level of this hybrid model that combines the best human and digital capabilities, retail customers may pay a small subscription to opt in to simple financial planning journeys and receive automated recommendations to keep them on track with saving goals. At the comprehensive level, customers may have multiple investment portfolios linked to different financial goals in appropriately tax-wrapped accounts, being managed algorithmically on a discretionary basis, with a quarterly meeting with a relationship manager to ask questions and discuss progress.
5. Customer experience
Meticulous attention to the customer experience is pivotal to realizing this hybrid advice model. As more industries blur the lines between digital and human interactions, designing for a seamless, channel-agnostic customer experience will increasingly be the great differentiator. Providers should develop the capabilities to conduct ongoing customer research and user engagement and combine insights from this with usage data derived from digital platforms. Again, partnering with trusted experts will hasten the move to a modular, personalized, multi-channel experience. And considering the size of the commercial opportunity, the need for speed is obvious.
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This article was written by Sam Beeby, Sean O’Mahony and Edouard Fox from Cognizant’s Wealth and Asset Management Consulting practice.
