Rahul Sharma leads the financial services insight team at Deloitte and discusses the potential impact of automated advisers
Much has been written about how automated advisers, more commonly termed ‘robo advisers’, could disrupt the market for investment advice in the UK.
But where else could automated advice spread? Deloitte recently finished a primary research project that examined the potential for automated advice to grow in the UK over the next decade.
The research pointed to the UK offering a rich opportunity for automated advice. There is a significant ‘advice gap’, driven by the high cost of advice, low financial literacy, low engagement and a lack of trust.
With individuals increasingly having to manage their own pensions, automated advice can play a key role in generating low-cost solutions by using its potential to drive greater efficiency, improved consistency of advice and greater convenience for customers.
Deloitte’s analysis suggests high potential, with more than one third of consumers willing to pay for automated advice. We estimate that this collectively amounts to a pool of around 15 million customers, with a large potential customer base in each of the markets we examined.
This is remarkable in the context of low engagement and financial literacy, and in the absence of any major initiatives in this area by UK incumbents.
It also suggests a clear appetite among consumers for affordable, non-traditional tools to manage their finances.
Demand is high among consumers in their early forties, not just millennials. Demand also rises with income. While demand also generally rises with wealth, one exception is DC pension saving, with demand high among those with smaller pension pots – something we see as a call for help on their part and an opportunity for DC plan providers.
The amounts consumers are willing to pay, however, are generally low. For example, 68% of working DC scheme members who would pay for automated advice would demand a discount of at least 75% on the typical cost of face-to-face advice on investing contributions. Pricing these services affordably and carefully targeting customers will, therefore, be key.
While demand prospects are healthy, if price-sensitive, providers will need to address generally low engagement and financial literacy, and address a potential lack of trust.
That means accessing customers is generally very expensive, especially for brands with little to no consumer awareness. Low fees in combination with these high customer acquisition costs will inhibit provider appetite. In addition, many incumbents are concerned by the potential for switching away from their higher-margin advised products.
Key questions CFOs need to ask themselves when considering offering robo-advice:
- Where is it feasible for you to maximise profit in the value chain e.g. advice, products?
- How do you acquire customers profitably?
- How much to charge (if anything) and how should you structure charges e.g. fixed or as a percentage of assets?
- How can you scale up your propositions?
- Costing of technology platform – purchase / development / maintenance?
Regulatory risk is also a key barrier. Providers in the UK frequently report that uncertainty in determining which services are regulated is a big inhibitor. The UK Financial Conduct Authority (FCA) is supportive of the development of automated advice models and is planning to publish regulatory guidance and feedback that should help reduce the degree of uncertainty.
Other regulatory challenges include the clarity of customer communications, the design and oversight of algorithms, and cyber risk.
Firms will need to adjust their risk and control frameworks to reflect the different customer journeys and to identify, review and manage the different types of risks presented by automated advice.
Given all these constraints, providers are likely to adopt digital solutions as far as possible to keep costs low. But current regulatory requirements as well as low financial literacy – and given the cost and complexity of some of these products, in at-retirement and mortgages, for example, mean a fully digital model without any human overlay may not be feasible today.
Deloitte expects wealth management will remain fertile ground for innovation, given current low rates of return offered on savings. However, we believe that the low cost and high convenience of automated advice will drive its adoption beyond wealth management, into retirement products, where there is a significant unmet need for advice, and into mortgages, where automated advice can drive significant efficiencies for providers and a much-improved experience for customers.
In terms of type of service provider, there is no one clear winner.
Banks are well-placed in many markets due to their access to customers, although data sharing mandated by open banking regulations will help new players.
Life insurers, who typically administer large corporate DC pension plans are well placed to target plan participants.
More generally, incumbents are better placed than start-ups due to lower customer acquisition costs.
However, start-ups do have an opportunity in B2B roles, given their lead on technology and in building leading-edge customer interfaces.
In short, we believe incumbents do not have the luxury of watching and waiting, but that they must exploit their first-mover advantage, as disruption could come not just from today’s start-ups but from well-funded non-traditional players, such as retailers or tech giants, perhaps partnering with select industry players.
Rahul Sharma leads the financial services insight team at Deloitte. He has over 16 years of investment experience in global roles at Alliance Bernstein, Citigroup and Martin Currie. He is a regular commentator on the BBC, CNBC, Financial Times and Bloomberg.