What will financial advice look like in five years' time?
What does the future look like?
What will the financial advice profession look like five years after the retail distribution review? Some predictions can be made based on the usual assumptions: there will be fewer advisers overall, possibly a 30% reduction, as clients turn off ongoing remuneration, advisers retire, and new threats to pricing and business models emerge.
Financial planning will move upmarket, providing excellent advice to well-off individuals. At the same time, online advice will continue to take over, with offers of good-quality ‘free’ advice; and the market will still be fragmented with very large firms, small boutiques and just a handful of businesses in the dangerous middle ground.
How might financial services look, however, if some of those assumptions changed?
Some of the usual assumptions
The structure of financial services is still geared to moving products, and advisers are still seen as the agents of distribution.
Complex advice is delivered face-to-face.
Financial products are sold, not bought.
Clients will pay a percentage of assets invested as a charge.
Around 98% of the value in the industry is owned by product manufacturers.
Satisfying regulators trumps being customer-friendly.
The effect on advice firms if these assumptions changed
Technology at the individual firm level is not yet good enough to cope with a move to online advice. Many advisers could be marginalised quickly if such technology became available and widely accepted by consumers.
Online delivery innovation might also allow advisers to redesign their delivery processes radically to effect them more cheaply (reducing costs of advice by 50% to 90%), preserving the adviser’s place in the marketplace rather than eliminating it.
Flat fees unrelated to assets under management might emerge, reducing costs to consumers (who decided an asset-based fee was a good idea anyway?) and crushing margins for
Staffing skills within advisory firms might change dramatically, making large sections of the industry redundant and unemployable (as in the print industry 20 years ago).
Simpler buying processes may result. Consider how you click ‘agree’ when your Apple or Microsoft software upgrades. Will clients do the same with online suppliers of advice, supplying the same level of bumf you supply now?
Assumptions you could change that would radically alter your position in the industry
Own the product using investment solutions, software and infrastructure.
Demand a greater share of the revenues from the owners of existing investment solutions, software and infrastructure (although it might already be too late).
Design your own online advice delivery capability. Even if only parts of the process were automated online you may create a significant cost advantage over your competitors.
Use new online offerings as part of your own advice process. For example, hold normal first meetings but use an online investment service as your outsourced investment option. You retain ownership of the client relationship and can charge for the high value piece (the advice), but incur no development or running costs on the investment technology.
The worst-case scenario for you or your business
External technology suppliers not yet in the advice sector enter the arena to provide cheap, good-quality services, dramatically altering the perception of the value of face-to-face advice delivery and eliminating all pricing power. Advisers and firms become price takers.
Small advisory firms become untenable because of the investment spend required for technology.
Technology companies end up owning 98% of the value in the industry and have no relationship, connection with or love for advisers.
What situation is so dire you know it will never happen and so unrealistic it seems pointless to prepare for it?
There remain some open questions. What would be the effect on your business if the above did happen? How would you respond and what would you do?
Think about not just how you would respond, but also whether it is possible to get a jump on your competitors by creating some disruption yourself.
Questions are taken from Phil McKinney’s book,
Beyond The Obvious: Killer Questions That Create Game Changing Innovation.
Brett Davidson is a partner at Mode.