Most at risk will be Asset and Fund Management firms, large and small, who have over the last two decades been able to extract generous margins and the lion share of the value in the advice chain.
Historically they have managed to keep themselves ring fenced from the risk of owning distribution. However with increasing evidence that automated advice propositions will be built around a far smaller range of funds, managers who don’t have their own distribution channels may find themselves taken out of the value chain altogether. These firms need to act quickly to secure a place in this new market otherwise they might all too easily find themselves the financial services equivalent of record shops in the digital music era.
So what about Financial Advisers? For them, at least in the short term, it’s probably more a matter of how much do they want to benefit? There will continue to be healthy demand for traditional advisers who only want to operate in the way that they have for the last 40 years and restrict their customers to wealthy people? Pension Freedoms have precipitated an unparalleled need for advice but going forward advisers need to invest in being able to have digital relationships with their customers.
For those who choose to invest aggressively there is an enormous opportunity for advisers to grab market share in a whole new sector of the market. Noticeably many of the most innovative start-ups in the US digital advice market have been created by RIAs, and there is growing evidence of similar activity by IFAs in the UK.
One thing I don’t understand is why are so many really good Financial Advisers intimidated by the idea of digital advice? No financial adviser with a good value proposition has anything to fear from it. At the very least it can help them ensure the customer has more knowledge before they meet and will be in a better position to understand their advice. That said if an adviser is simply conducting some rudimentary risk profiling and then putting the customer into a risk rated funds the price of such services will be rapidly reduced to little more than zero.
For this reason Wealth Managers may find themselves under significant pressure if they cannot clearly evidence wider added value. As for Discretionary Fund Managers, who have had a real boom post RDR, opinions are split currently. Some early digital advice firms believe DFMs can play a crucial role, I am less convinced of this and see them as just as vulnerable as other fund management businesses.
For Pension Providers, especially those engaged in the Auto Enrolment market, digital advice represents an enormous opportunity to engage with millions of customers who would otherwise be uneconomic to assist. Similarly this will give them a cost-effective way of supporting so-called “orphaned clients” whose advisers have either left the industry or had disengaged with the consumer because of the sunset clause.
The biggest winners from the emergence of digital advice will clearly be consumers. Those priced out of advice by the Retail Distribution Review will again have access to the help they need. For wealthier people the economies achievable through the use of digital solutions should significantly reduce their advice and investment costs, even if they continue traditional relationships.
At the FCA Robo Advice Forum this week Blackrock Managing Director Thomas Fortain said digital advice is at the top of every US Investment CEO strategic initiative list, whilst we have not quite reached that stage in the UK the smartest businesses are prioritising understanding this key new sector.
(with thanks to Ian McKenna -Director, Finance & Technology Research Centre)