A recent study revealed that nearly six million people would be willing to pay for advice if it cost less, but experts have argued that the increasing number of robo-advisers has widened this advice gap and labelled the Financial Conduct Authority (FCA) “naïve” for suggesting otherwise.
According to the study by financial advice service Open Money in conjunction with YouGov, almost 400,000 more people now fall into the affordable advice gap, which affects consumers who are willing to pay for advice but think it is too expensive.
Simon Bussy, director at Altus, notes that digital-only ‘robos’ were hailed in the FCA and HM Treasury’s Financial Advice Market Review (FAMR) as being the potential solution to the advice gap, but believes this was “misguided and naive”.
He adds: “The Open Money service has definitely moved the thinking on – it’s [robo-advice] not a linear proposition into a pre-baked set of portfolios, as many others offer, but a broader service backed by a human adviser, underpinned with technology, and offered at a sensible price point.”
Open Money chief executive Anthony Morrow, says robo-advice is often touted as “filling the mass market advice gap”, but while some digital providers now offer one-off advice, many simply offer online investment management without real financial advice and personal recommendations.
“Without offering personalised ongoing advice, these digital wealth managers cannot replace the service provided by advice professionals.”
Speaking to Portfolio Adviser about the research, Morrow explains how the gap is widening because advice is only available to those with a substantial amount of money.
“Often, traditional face-to-face financial advice is only accessible to those who have already accumulated wealth, while many robo-advisers simply use online tools to guide people into ready-made portfolios without providing regulated advice or helping those who are not ready to invest, leaving the investment and other advice gaps largely unaddressed.”
“We believe a combination of expert human advice with technology can bridge the advice gap across investment and other areas to help people make the most of their money,” he added.
Lack of awareness
The advice gap currently affects all areas of financial decision making, and in terms of choosing financial products, the Open Money survey found the highest levels of confidence are in products such as current accounts, insurance, energy tariff, credit card and a savings accounts.
Just over one-third of the survey sample said they would feel confident in choosing a personal pension, indicating a clear need for financial advice for many, yet only 16% said they would consider taking paid for advice around arranging a pension.
However, experts in this space have argued that the growing advice gap is not just down to advisers’ fees or robo advice, but also because consumers have a lack of awareness of the ‘free advice’ that is readily available.
Open Money found that the awareness and referral gap, which affects people who do not know where to get advice, has increased by over five million people since 2015. As many as 15.2 million people who would benefit from free advice are not aware of public financial guidance, it found.
Commenting on this, Bussy says: “The research shows that almost 20 million people who feel they would benefit from ‘free advice’ have not received any in the past two years. This is a shockingly high number when there is so much government-backed, local and employer help and support available to people, as well as a whole host of industry-produced support.
“Consumers are either not aware, or don’t understand what’s available or how to access it.”
“An appreciation of ‘good’ and ‘bad’ debt, the dangers of credit, the importance of protecting your loved ones, and of building up a buffer of emergency savings – these are the priorities that need to be understood and put in place,” he adds. “As an industry, we need to focus on consumer pain-points and financial needs, not launch yet another investment fund or product.”
Advice gap or advice vacuum?
The FCA recently signalled its intention to look at the advice gap in its call for input on Evaluation of the Retail Distribution Review and the FAMR, asking how consumers access advice and guidance and barriers to making services more affordable.
However, Mike Barrett, consulting director at the Lang Cat, says: “It’s becoming increasingly clear that it isn’t really an advice gap, it’s more akin to an advice vacuum.
“Traditional face-to-face advisers simply are not serving investors with smaller amounts or simpler needs. Traditional advice is flourishing within its target market, but new solutions are urgently needed to ensure the whole population can benefit from regulated advice.”
But, Bussy adds: “Let’s not get hung up on the ‘advice’ word. UK consumers need help and support to better manage their personal finances. And whether that’s ‘advice’ or not is absolutely not the crux of the problem.”
He explains that the priority should be to get the right financial building blocks embedded from an early age, and then further develop them throughout adult life. Many people using robo-advice for investment purposes are unaware of if that is the right thing for them.
Morrow says: “Bridging the advice gaps requires the financial services industry to work together with financial guidance organisations and a wide range of bodies including the government, FCA, local government, employers and medical professionals to improve awareness and take-up of existing financial support and promote the benefits of protecting our financial futures through money management, financial planning and, crucially, suitable financial advice.”
