The FCA would be well-advised to embrace automation in the advice sector when it comes to its review of the RDR and the FAMR, argues Tom Murray.
The Financial Conduct Authority (FCA) in its wisdom has decided that the time is ripe for a review of the two major initiatives of the last decade in the financial advice arena – the Retail Distribution Review (RDR) and the Financial Advice Market Review (FAMR). Both the RDR and the FAMR resulted in major changes to the UK advice market, inter alia around the areas of payment for advice, educational levels and improvement in the type of information given to clients.
The FCA is to be congratulated in its willingness to review the effect of its own regulations so soon and endeavouring to deal with any inadvertent, unwanted consequences that have resulted from it. Rather than blindly seeking to impose its view on the market, it is open to review mistakes it may have made and to endeavour to rectify any found.
Influencing the response
Where the FCA needs to be careful is that in seeking a response to the effect of these regulatory initiatives, they do not over focus on the regulations but keep in mind the end goal. The key question, when it comes to reviewing these policies, is how effective they have been in achieving their aims; to assess this accurately one needs to focus on the desired goal and how good the policies have been in facilitating providers in meeting that goal.
Key event fascination
In order to establish customer needs, the classic approach is to focus on key events in the consumers life; starting work, buying a house, having children, approaching retirement. This is all well and good; indeed, financial advice is very important at all these events. It is just that these events are focused solely on when the customer’s needs are changing, and completely ignores other things such as market changes, societal changes or those times when customer wants are changing. The approach assumes that people will, without prompting, realise when they need advice outside of these key events and will therefore go and seek it out.
Here a good comparative to how people look after their financial health is how people look after their physical health. In the old days, people attended the doctor purely for remedial reasons; they were sick and therefore needed to be healed. Nowadays, people are far more likely to go for health checks for preventative purposes, even when there is nothing discernible wrong with them. Regular assessment is seen as the optimal approach to maintaining a healthy body. Prevention is seen as a far better investment of time and money than seeking a cure when things go wrong.
It is surely no coincidence that the UK has what is widely acknowledged to be one of the leading healthcare systems globally, and it is free at the point of use. There is no financial barrier to being pro-active in managing one’s health and this shows through in the amount of people who are thus empowered to take responsibility for preventing their own ill-health.
Little and often fills the purse
For preserving and improving one’s financial health, surely the same approach is needed? Regular and ongoing expert advice along with the ability to stay in regular contact with the details is likely to be needed if one is to ensure robust financial health. Like sailing a ship, regular small tacks in response to changes in the prevailing wind is far more likely to help one get to one’s destination than irregular changes in direction only done when one has already gone miles off-course and possibly into dangerous territory or even already been driven onto the rocks.
However, the approach of the RDR and FAMR in ensuring that financial advice was costed and delivered professionally via fees, thus removing the distorting effect on the market of commissions, it clearly has opened an advice gap. There are far too many people who won’t take advice because they either can’t afford it or because the long-term benefit is too distant to outweigh the immediate effect on their finances of paying for it.
The public gets what the public wants
The idea of constant ongoing monitoring of one’s financial products is one that probably doesn’t seem to be driven by popular demand. But one only must throw one’s mind back a decade ago to when most banking was done in the local branch. Then people were satisfied with far less access to information about their own money, only going to the bank branch when they needed to make a transaction. The general public could never have imagined a day when they could check on their finances at any time of day or night. Nor could they have imagined that they would ever want to.
Speed forward a decade and here we are, with cross-platform banking a reality that most of the population engage with; most would now insist upon it as the minimum service level they would expect from any new entrant to the banking scene.
All or nothing
Just because there isn’t a demand for constant and regular access to financial advice doesn’t mean that one won’t emerge the second that someone is brave enough to offer it. And by advice here, I don’t refer to a minimalist selection of funds based on c.10 attitude-to-risk questions. This can be dangerous, as it gives the idea that one is getting expert advice, when an IFA might have advised against this product completely after a proper review of the customer’s personal position.
I’m talking about full holistic advice, based on a thorough fact-find of the customers circumstances and in-depth analysis of their needs and wants in order to help them define the financial goals needed to meet those aspirations.
Of course, the wealthy have always had other people managing their financial affairs, because they could afford to pay for it. Now that saving’s policies and societal changes have ensured that there is a growing segment of the population with significant wealth, and Government policy is to increase the number of people providing some or all their own financial security, the same level of regular access to financial advice available to the wealthy is required by the general population. Indeed, given that the majority will have far less in savings than the traditional wealthy, they are less able to withstand a bad financial decision, and therefore their need for advice is greater than those who have more capacity to survive a bad investment or two.
Clearly, automation is key to providing the solution. As in so many areas of modern life, automation is providing the ability to make key services available to a much wider audience than when one relies on individuals. NHS 111, for example, provides automated access to healthcare professionals for the general public, using a combination of phone, website and mobile apps to allow people direct access to NHS professional care on a 24x7 basis without having to visit a specific A&E department or health professional.
For financial health checks, the same principle applies. People want to be able to review their financial position at a time and a place that suits them, and they need to be able to afford to do it on a regular basis without the cost, in either money or time, overriding the benefits of the process.
Enter Alexa… or one of her siblings
The only way this can be provided is through a much higher use of automation in the advice industry. Advice bears one of the key characteristics for things that can be easily automated; it is a highly regulated area, and therefore it is highly rule-based. Rule based systems are far easier to automate and deliver consistent, verifiable results.
To date, there hasn’t been much inventiveness in this arena. Robo-advice has been primarily focused on rather simplistic systems, which only provide advice on a minute proportion of the financial sales process. This is when the individual investments are to be decided - the bit after the decision to buy has already been taken. Whilst this is useful, the role of a real financial adviser is far more complex. People rarely if ever turn up at an IFAs office telling the adviser the precise product they wish to buy and then asking for advice on the particular investment funds only.
So, if the population is to get the quality of advice it requires, what is needed is to automate the full holistic advice process that is provided by an actual adviser. One could envisage how this could be linked to bank and credit card accounts to extract the spending information and keep the individual’s fact-find up to date. Similarly, people are getting used to interacting with robots such as Alexa, Siri and Google. It won’t be a big leap to move to the point where systems such as these could take the pain out of fact-finds by doing it on a Q&A basis, rather than requiring consumers to enter the details manually onto the system.
Clever use of technology would allow people to sign-on in the comfort of their own homes, or via their smart-phones whilst travelling, and stay in touch with their progress towards their financial goals without endlessly having to update the details. Automated alerts could also prompt them to review their finances and make necessary changes based on their progress towards their goals or to alter their goals when that was the best option.
Helicopter view required
To assess whether the advice market is working, the FCA need to be clear about their ultimate aims. The market cannot be working well if there is a cost barrier to accessing it. Clearly, there will be occasions when a financial situation is so complex, that an automated system should only recommend transferring to a human adviser, but for most people at the majority of times, advice will follow a well-specified path, and therefore it should be possible for an automated adviser to provide it.
Based on mass-usage, an approach to charging like Netflix could be applied, whereby people could sign up for a small regular amount and then use the system as often as they want and at a time and place that suited them. This would require the robo-advice system to be available on a multi-platform, 24x7 basis so that there were no restrictions foisted upon the customer.
From this point of view, clearly the main emphasis of the FCA should be the encouragement and support of the development of true robo-advisers, that can provide a consistent, ongoing service at a price that is affordable.
Toying around with guidance is a bad move. No one would ever look to seek partial guidance on the law or their health just to save money. Similarly, no one really wants a partial financial review based on guidance rather than an expert opinion. The only reason people would settle for it is that the cost of full advice is prohibitive on a regular basis for many, or even as a one-off for some sections of the population.
Without a total focus on automation, any other options would be truly second-best. The future is a digital-first environment where customer expectations will drive towards doing everything in a way convenient to them. From cars available just when they want to use them, to meals delivered where and when they are required, the convenience lifestyle will predominate. The life and pension industry cannot be immune to this and the provision of financial advice, a sophisticated and time-consuming process, is certainly going to be far more effective and enjoy a much higher take-up if it is available to the consumer in the way that suits them and is affordable. The future of advice is going to be highly automated and the FCA’s review will be a wasted opportunity if it doesn’t reflect this.
This article was originally commissioned for the June 2019 edition of the Investment Life & Pensions Moneyfacts Magazine.