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Mind the advice gap

Jan 10, 2022

Experts say there’s not just one advice gap but four. The focus should be on demonstrating value, building trust and using tech to ‘democratise’ this vital service Shutterstock / optimarc / zevi furnia / leon parks If there is one thing on which surely everyone agrees, it’s that financial advice should be accessible to all. Advisers, regulators and providers have all extolled the value of advice and its benefits to consumers. Financial advice can have a positive impact on people’s life and wellbeing. For example, they can receive help in making the most of their money, prepare for the future, and get support to navigate the complex labyrinth of the tax, investment and pension systems. People want to be convinced advice will make a difference to their finances Notwithstanding the consensus on the value of advice, the issue of affordability understandably generates disagreement, with many in the advice sector falling into one of two camps: those who believe it is impossible to provide ‘affordable’ advice due to the regulatory burden on advisers, such as the Financial Conduct Authority and Financial Services Compensation Scheme levies and professional indemnity insurance (PII) costs; and those who think technology and automation, such as robo advice, digitisation and hybrid advice, could provide free or low-cost advice to the mass market. Lack of awareness As the affordability debate rages on, millions of consumers are missing out. Fewer than one in six people is taking advice, according to online advice service OpenMoney. It says many consumers lack awareness of the benefits of seeking advice and of how and where to find it. This has created a situation many in the sector have termed an ‘advice gap’, referring to the people who want financial advice but can’t afford to pay for it’. In 2015, Citizens Advice published ground-breaking research on the advice gap in the UK, which suggested a more nuanced reading of the financial advice sector. It argued there was not a single advice gap but rather “a series of advice gaps, which lead to a range of people missing out on the benefits of financial advice and the security that it affords”. It’s up to us to show how a good financial plan can deliver life-changing results Citizens Advice identified four advice gaps millions of consumers fell into: the affordable advice gap, the free advice gap, the awareness and referral advice gap and the preventative advice gap. The affordable advice gap affects consumers who are willing to pay for advice but not at current prices. The free advice gap impacts people who want advice but are unable to pay for it. The awareness and referral gap covers those who are not aware advice exists or where to obtain it. And the preventative advice gap affects people who would benefit from receiving advice as a preventative measure. Grim statistics OpenMoney, which is working to bridge the overall advice gap, has reviewed the four gaps first identified by Citizens Advice in 2015. Its 2021 advice gap report makes for grim reading. OpenMoney found millions of British consumers were still being left behind as the financial advice gap continued to widen. An estimated 20 million people (39% of adults) are believed to be in the free advice gap and around six million fall into the affordable advice gap. The latter figure is up from 5.3 million in 2020. The number in the awareness and referral gap has also increased, from an estimated 15.1 million in March 2020 to 15.4 million in 2021. However, the preventative advice gap has seen a drop, from 20.4 million to 16.2 million people. You can go online and look for guidance but at some point you may want to check it with an adviser The OpenMoney report also found fewer people were looking for advice in 2021, with just one in 14 paying for advice compared to one in 10 in 2020. OpenMoney says its advice gap report should serve as a wake-up call to the advice sector: do not make paid financial advice and its benefits the exclusive domain of the wealthy and people with high net worth. “People want to be convinced taking advice will make a difference to their finances and save them money overall,” says OpenMoney co-founder and report author Anthony Morrow. “Restoring people’s faith in the benefits of financial advice is therefore crucial to closing the advice gaps.” The cost of advice, that old chestnut of the advice sector, remains a significant concern. The report showed, among people who would be unlikely to pay for advice, women were more cost conscious than men. Around 20% of women said they would be willing to pay for advice if it cost less, compared to 14% of men. Communicating digitally allows us to develop more cost-effective advice solutions for new client demographics However, young people were least concerned about cost, with just 11% of 18- to 24-year-olds identifying it as an issue, compared to 20% of those aged 35–44. “The fact one of the key barriers to taking regulated financial advice is cost simply means we’re not doing a good enough job as an industry of demonstrating the benefits,” says Progeny chartered financial planner Anna Jones. “It’s up to us to show how a good financial plan can deliver life-changing results — financially and emotionally — not just for the individual but for future generations of their family.” She adds: “We regularly talk about bringing new blood into the industry, but it’s clear we need to put equal focus on reaching out to the next generation of clients. Technology will play a huge part in helping us bridge the advice gap in the years ahead “We all have a part to play in building our industry into a profession that eradicates the advice gap by creating products, services and a financial advice community for everyone.” RDR benefits In 2012, the FCA introduced the Retail Distribution Review (RDR) to improve consumer outcomes from financial advice and guidance. Many think the RDR has been very good for the advice sector. “The industry is in a much better shape now than pre-RDR,” Morrow said recently at a Lang Cat webinar. “The quality of the products is better, there is more transparency, the level of professionalism has increased with qualifications, and the fee-charging structures have been removed. But, on their own, these are not going to persuade anyone to take advice, nor suddenly make advice more accessible or affordable.” Financial institutions across the board need to do more in terms of signposting and collaborating However, the high cost of advice and the widening gap are said to be some of the unintended consequences of the RDR. This is ironic given the review was initiated by the regulator precisely to address the advice gap. The hourly charging rate of financial advisers ranges roughly between £150 and £350, according to the Money and Pensions Service (Maps). This rate is prohibitively expensive for the average UK worker who may struggle to make ends meet. According to Maps’ Financial Wellbeing Survey 2021, nearly one in two adults (45%) doesn’t feel confident managing their money day to day. And around 19 million people (36%) feel worried when thinking about their financial situation. The research also found those most likely to feel worried when thinking about money were private renters (51%), young people aged 18 to 34 (50%) and parents (48%). Yet all these groups typically would gain from receiving advice. Paying an adviser isn’t going to magic extra income out of nowhere Research in 2019 by Royal London and the International Longevity Centre UK found the benefits of receiving financial advice were potentially greater for those the researchers termed ‘just getting by’ than for those they considered ‘affluent’. Underscoring the merits of advice, the research also revealed people who had received professional financial advice between 2001 and 2006 subsequently saw a total boost to their wealth (in pension and financial assets) of £47,706 in a decade (2006–16). FCA reviews When the FCA launched both an industry-wide review of the RDR and its Financial Advice Market Review (FAMR) in 2019, it found the quality of advice had improved but both the cost of advice and the advice gap had grown significantly. One of the recommendations that came from the FAMR was to make financial advice more accessible through the workplace. This was welcomed by employers as a laudable step towards reducing the advice gap. A series of advice gaps leads to a range of people missing out on the benefits of financial advice and the security it affords Quilter Financial Services is one firm that is using its corporate affinity partners to empower employees with meaningful financial education. It has also launched its own Quilter Employee Financial Programme to provide staff with a free financial review from an adviser. “If they don’t need advice right now, at least they know what a financial adviser does,” says Quilter Financial Planning national advice managing director Amanda Cassidy. “And if down the line they want advice on their pension or are looking to buy a house or need critical-illness cover, they’ll know the financial adviser’s role can help support that.” Auto-enrolment The auto-enrolment pension scheme introduced by the government nine years ago has also been successful in getting millions of people to save for their retirement. Some argued the scheme could be a catalyst to launch advice and financial education in the workplace. However, not all employers are as fortunate as Quilter. Some continue to struggle to understand what they can and can’t offer without crossing into regulated financial advice. Financial advice firms are commercial, not charitably funded, enterprises, with commercial overheads Women have been disproportionately affected by both the advice gap and the pension gap. A study by the Centre for Economics and Business Research (CEBR) found the Covid pandemic had widened the pension gap between men and women. The CEBR found retired women received £7,500 a year less than men of the same age. Insufficient female advisers The low take-up of paid financial advice by women has been linked to the lack of independent female advisers; the industry proportion is just 13%. This is a dismal figure given women make up more than half of the population. “A lot of women are not looking at taking advice because they would prefer to sit and talk to women [advisers]. They want to know which financial product is relevant to them. Women like to know before they jump in. I think that’s part of the issue,” says financial planner Susan Hill. Progeny’s Jones adds: “It’s no secret we still have a lot of work to do on both the gender and diversity fronts in terms of recruitment into the sector. “I think a key issue is financial services as a whole is still not an area that many people consider when they are making career decisions at school age. For the future generation of planners it’s all about creating clear, inclusive career pathways.” If our staff don’t need advice right now, at least they know what a financial adviser does A large percentage of financial advisers stumble accidentally into the profession. Cassidy believes the flexibility it provides is suitable for working mothers and those seeking a second career, such as former soldiers and sportspeople with life skills. Another issue of concern for Cassidy is the ageing group of advisers who are due to retire, and the shortfall in recruiting new advisers to fill their shoes. She says the sector could see as many as 7,000 advisers leave over the next five to 10 years, while the number of consumers who need advice is increasing. The average age of financial advisers is 55 and one in five of them plans to retire in the next five years. Cassidy says the issue needs urgent attention. The fact one of the key barriers to taking advice is cost simply means we’re not doing a good enough job of demonstrating the benefits “I passionately believe everyone should be able to receive advice. It should be affordable for everybody. People should be able to get the guidance and support they need. “To do that, we need to make advice accessible for everyone.” Gap deniers However, there is a small but growing number of advisers who believe strongly the advice gap doesn’t exist. Some have made their views known in the below-the-line comments on Money Marketing’s website. Here are a few that caught my attention. One commentator wrote: “People with no money don’t need regulated advice on how to make the most of their no money. They need a lot of things but regulated financial advice is not one of them.” Another wrote: “Financial advice firms are commercial, not charitably funded, enterprises, with commercial overheads over which they have little control, not least regulatory levies and PII costs.” Yet another added: “If you’re looking for someone to tell you to reduce your spending to build a retirement fund, you don’t need to pay for highly qualified, PI-insured, heavily regulated advice — you can get that online for free. Paying an adviser isn’t going to magic extra income out of nowhere, either.” We still have a lot of work to do on both the gender and diversity fronts in terms of recruitment into the sector However, these arguments don’t stand up. The statistics speak for itself, demonstrating the advice gap not only exists but is widening at an alarming rate. The FCA’s Financial Lives 2020 Survey found 38 million UK adults were not receiving any form of financial guidance. Meanwhile, according to OpenMoney, six million adults — roughly the combined population of Birmingham, Manchester and Sheffield — want advice but think it costs too much. Jones says: “Financial institutions across the board need to do more in terms of signposting and collaborating to build free educational resources, to help raise the level of basic financial knowledge and confidence throughout our society and avoid financial pitfalls.” Cassidy agrees, saying there is a large amount of money in cash in the UK because consumers are not receiving advice on what to do with it. Restoring people’s faith in the benefits of financial advice is crucial “You can go online and look for some guidance but at some point you may want to check it with an adviser,” she adds. Research from the Money and Mental Health Policy Institute found under-25s were more likely to turn to social media for financial advice than to pay for a professional adviser, with almost one in 10 respondents in the 18–24 age group saying they used social media such as TikTok and Instagram for financial advice. “There is certainly urgent work required here to raise awareness of the long-term benefits of regulated financial advice with the future generation of clients, as well as the associated risks of being influenced by unqualified ‘experts’,” Jones warns. Using technology The hybrid model and technology have made it viable to help more people get free or low-cost advice. Some advisers are beginning to use this model to offer consumers a low-cost advice proposition. A lot of women are not looking at taking advice because they would prefer to sit and talk to women advisers “Technology will play a huge part in helping us bridge the advice gap in the years ahead, giving us the potential to democratise advice to broader sections of the population,” says Jones. “Communicating digitally and delivering advice virtually allow the industry to develop more cost-effective solutions for new client demographics and break beyond the boundaries of the traditional advice model.” Trust and value Both trust and value are crucial to closing the advice gap. The OpenMoney research found, for many customers, trust and value were far more important than cost. A third (33%) of respondents who would be unlikely to consider paying for financial advice said they would need to be convinced advice would save them money. And a further third (32%) said they would need to be sure they could trust the advice. We all have a part to play in building our industry into a profession that eradicates the advice gap To succeed in closing the advice gap, the industry needs to embrace technology and hybrid forms of advice to provide more value. It can learn from other markets such as the US, where the power of technology and artificial intelligence has been successfully harnessed to provide regulated advice at low cost to millions of consumers. Other changes that would make a positive difference include recruiting more women and young people into the profession, introducing simpler forms of streamlined advice and providing personalised guidance services. After all, financial advice really should be accessible and affordable to all. It can bring such improvements to people’s finances as well as their wellbeing. Let’s hope this year we can work together to bridge the advice gap once and for all. This article featured in the January edition of MM. To read the full digital magazine click on the image below. If you would like to subscribe to the monthly magazine please click here . 10th January 20228:34 am

OpenMoney Acquisitions

1 Acquisition

OpenMoney acquired 1 company. Their latest acquisition was Jargonfree Benefits on November 05, 2019.

Date

Investment Stage

Companies

Valuation
Valuations are submitted by companies, mined from state filings or news, provided by VentureSource, or based on a comparables valuation model.

Total Funding

Note

Sources

11/5/2019

$99M

Acquired

1

Date

11/5/2019

Investment Stage

Companies

Valuation

$99M

Total Funding

Note

Acquired

Sources

1

OpenMoney Partners & Customers

1 Partners and customers

OpenMoney has 1 strategic partners and customers. OpenMoney recently partnered with uSwitch on January 1, 2020.

Date

Type

Business Partner

Country

News Snippet

Sources

1/21/2020

Partner

uSwitch

United Kingdom

Advice app OpenMoney updates money management features

By launching our -LSB- updated -RSB- OpenMoney app and partnering with uSwitch , we want to make it easier for people to manage their money and reach their savings goals with access to financial advice . ''

1

Date

1/21/2020

Type

Partner

Business Partner

uSwitch

Country

United Kingdom

News Snippet

Advice app OpenMoney updates money management features

By launching our -LSB- updated -RSB- OpenMoney app and partnering with uSwitch , we want to make it easier for people to manage their money and reach their savings goals with access to financial advice . ''

Sources

1

OpenMoney Team

3 Team Members

OpenMoney has 3 team members, including current Chief Financial Officer, Michael Davis FCCA.

Name

Work History

Title

Status

Anthony Morrow

Founder

Current

Michael Davis FCCA

Chief Financial Officer

Current

Emma Price

Chief Marketing Officer

Current

Name

Anthony Morrow

Michael Davis FCCA

Emma Price

Work History

Title

Founder

Chief Financial Officer

Chief Marketing Officer

Status

Current

Current

Current

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