Technology, platforms and the advice gap

We are currently at high tide again, with the Financial Conduct Authority gathering feedback on new proposals to tackle the issue.

This is by no means the first major effort to close the gap, which has now been a serious concern for more than a decade.

That in itself tells us the chances of a swift resolution are somewhere between slim and zero – and most likely much nearer the latter.

By and large, the saga can be traced back to the Retail Distribution Review. Introduced by the FCA’s predecessor, the Financial Services Authority, the RDR set out to fundamentally transform the landscape of financial advice in the UK.

One of the most striking ways in which it achieved this goal was to raise professional standards.

This arguably served to rid the market of many advisers of dubious competence, which has to be seen as a good thing.

There are really only two means by which tech can manifestly help address the enduring scourge of the advice gap. One is robo-advice, and the other is advised platforms.

Unfortunately, the RDR simultaneously hastened the departure of many perfectly proficient advisers who did not relish the prospect of sitting more exams and jumping through additional bureaucratic hoops.

That is the law of unintended consequences for you.

The impact of this exodus is still being felt today.

The number of people leaving the industry has substantially outweighed the number entering it. The average age of an adviser is now nudging 60, and few of those who retire are being replaced.

All this is clearly bad news for clients and potential clients alike.

So how might we finally meet the challenge?

The FCA rightly identifies technology as central to the way ahead, yet it is vital to note that tech can often widen the advice gap rather than narrow it.

Tech minus advice

The main object of confusion here is the distinction between tech that enables access to advice and tech that merely enables access to investments. The first is part of the solution. The second can be part of the problem.

The 2022 edition of the FCA’s Financial Lives survey reported that just 4.4mn consumers sought financial advice during the previous year.

Meanwhile, almost three times as many “used information or guidance to help them with decisions about investments”.

That “information or guidance” came from websites, workplaces, social media and even family and friends.

As the FCA concedes, research has shown many of these sources do not instil investors with sufficient confidence in their choices.

This hardly seems like a recipe for long-term investment success and financial security. Yet millions of people essentially rely solely on such inputs before going online and plunging head-first into the stock market.

Alternatively, investors can cut straight to the chase by firing up a platform or app, choosing from a range of risk attitudes and letting an algorithm determine an asset allocation.

Naturally, this assumes users truly understand their own objectives, their appetite for loss and what risk is actually all about.

I should stress at this stage that I am not implying this kind of tech is utterly devoid of merit.

I get that it is a groundbreaking, potent mechanism for opening up the sphere of investment to a broader audience.

Yet it is safe to say it does nothing to close the advice gap. In many ways, it perpetuates the notion that professional advice is frequently unnecessary. And I think that is a dangerous direction of travel.

Advised platforms: opportunity and obligation

When all is said and done, there are really only two means by which tech can manifestly help address the enduring scourge of the advice gap. One is robo-advice and the other is advised platforms.

The former represents a pretty significant step up from the basic “select your risk attitude” model. It can be useful for retail investors who want a cheap and relatively informed route into the market.

You will not be unduly surprised to learn, though, that I favour the other option.

Advised platforms offer the best of both worlds, because they harness the power of tech while retaining the human element that unlocks genuine expertise and generates trust.

The tech component is there to make life easier for all concerned. It gives clients the degree of control they desire. It handles the “heavy lifting” for advisers and allows them more time to focus on engaging with the people who value their insight and experience.

Crucially, it also acts as an engine for strengthening relationships, encouraging dialogue and fostering co-creation. These are not benefits that are startlingly obvious in other settings.

Of course, tech alone will not miraculously make the advice gap disappear. History suggests all sorts of stars will need to align if we are to at last pull off that particular trick. But it will undoubtedly have an enormous part to play.

As platform providers, we have to recognise that this presents us with a huge opportunity.

Maybe, even more importantly, we have to acknowledge an ever-growing obligation to keep delivering products that are innovative, intelligent and inclusive.

Steve Andrews is chief executive of Novia Global