Recently, FT Adviser ran an article that asked: “Will DIY platforms disrupt the advice sector?” As you can see from the article, I was asked for my views but, as not all of the points I made were included in the final cut, I thought it worth detailing them here.
As an overview to the broad question about DIY investing disrupting the advice sector, I do believe that there will always be a place for good advice. After all, academic studies have shown that the value of ongoing advice far exceeds the value of taking one-off advice. For example, a study by the International Longevity Centre concluded “an ongoing relationship with a financial adviser leads to better financial outcomes, those clients who received ongoing advice had pension wealth 50% greater than those who took one-off advice.”
Are some advisers at risk?
My view is this is an issue for any adviser who ties their value solely to fund picking, particularly as the Vanguard proposition will be offering something comparable at a materially lower price. However, for those advisers who have transitioned to focusing on holistic financial planning, they are providing a wide range of value-add services that Vanguard’s offering can’t match, which justifies additional fees.
Only one in 14 people in the UK currently pay for financial advice. Anything that can be done to address that advice gap must be viewed as a good thing, not least because that gap is set to widen further as thousands of advisers will retire in the next 5-10 years and not enough firms are hiring younger advisers to replace them.
It’s not just Vanguard that traditional advisers should be keeping a wary eye on. Amazon, Google and Facebook are all amassing reams of data to inform their potential move into financial services. Their financial firepower means they can afford to run on very thin margins for a long time while they gain market share. Robo-advice 1.0 didn’t really work, but robo-advice 2.0 is likely to be a genuine threat to simplistic, but expensive, investment advice offerings.
The move towards remote advice (where the client never meets the adviser) or cyborg advice (combining technology and human insight) is very relevant for the upcoming inter-generational wealth transfer.
Feedback from advisers at our Young Adviser roundtables has indicated that millennials will consume advice differently. They are happy with a hybrid approach and may not need to meet their adviser in person every year.
They also want to access advice at a time that suits them so are unlikely to consider any form of advice unless information can be accessed as and when they want it via their smartphone. Many advisers have a long way to go if they want to future proof their business by catering for the needs of the next generation.
Higher value-add will survive long-term
You can draw a parallel with the asset management industry where passive funds have cannibalized any expensive closet trackers, leaving space for only cheap passive funds and truly active managers.
In the same way, Vanguards’ advice offering (and Robo 2.0) can be expected to displace expensive but simplified advice offerings.
I do believe though, that there will always be clients willing to pay for higher value-add, full advice offerings.