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Four advances that will change the face of financial advice

Heather Hopkins looks at four advances in technology, charging and other business practices will change how advice firms run in the future.

Financial advice has undergone significant change in the past five years. Much of it was forced by regulation, but technology has also played a key role. What might the next five years bring? The following are four shifts that will reshape the advice market.

Financial advice has undergone significant change in the past five years. Much of it was forced by regulation, but technology has also played a key role. What might the next five years bring? The following are four shifts that will reshape the advice market.

1. Most investment planning will be done by algorithm

The rise of the robots is real, at least in financial services. Algorithms will do a better job than humans at matching an investor’s objectives to the right portfolio. They will make asset allocation decisions, and monitor and report performance. Financial advice firms will rely on algorithms to construct and manage portfolios, and to report on investment performance.

This is great news for investors: returns may improve and costs will decline. But it will probably be great for advice firms and the public too, since it could bring advice to parts of the market that are underserved today.

2. Advisers will adopt digital tools to boost efficiency

While I do not expect robo-advice offerings to replace the financial planner, aspects of the advice process will certainly become automated.

Automated tools do a good job with client fact-finds, assessing risk tolerance and streamlining account opening. At the moment, only around half of advisers offer clients online access to account information, one of the most basic digital tools clients expect.

Advisers will adopt technology to allow them to offer investors a better and more efficient service. This will be driven by client demand for a better service, rather than an effort to reduce costs, although I fully expect costs to come down too.

3. Rise of flat fees

Although much progress has been made to separate financial planning from investment products, the way many advisers charge for their services blurs the lines between product and financial planning. In the next five years there will be a shift away from assets-based charges for financial planning. Moreover, many advisers may begin to separate charges for financial planning and investment management.

Most investors say they want to dip in and out of advice as and when they need it, but are happy for a firm to manage their investments on an ongoing basis. Creating a distinction between investment management and financial planning will better meet customer needs.

 

4. Adviser fees will come down but the share of fees advisers command will remain high 

In 2016, mutual fund houses experienced a decline in profits in a year when assets increased. Data from consultants McKinsey & Co suggests profits from traditional fund houses fell 2.9% in 2016 while assets under management grew 3%. 

Advisers must be feeling the pinch. Data from platform Nucleus shows that as a percentage of assets, ongoing charges paid to advisers decreased for the first time in the first quarter of 2017.  

As client portfolios grow, advisers have reduced their percentage charges. The Financial Conduct Authority has signalled it will be looking at value for money in its financial advice market review in 2018, putting further pressure on fees.

Fees will come down but there is also a move from the back of the value chain to the front. In the past, more value sat with those at the back, who were farthest from customers. That has and continues to shift to those closer to customers. I expect advisers’ proportional share will continue to grow.

Be prepared 

Customer experience will improve with better and slicker technology. But the biggest changes will happen behind the scenes with investment management handled by algorithms and better processes to more efficiently manage client money.

Although these changes may seem small, failing to keep up can be costly. IFAs must bear them in mind as they look at the next half decade of financial advice.

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