Over 70 per cent of financial advisers believe the advice gap expanded over the last 5 years, according to an intelliflo survey. Nick Eatock, CEO of intelliflo, considers at the findings.
When the Retail Distribution Review (RDR) took effect almost a decade ago there was no shortage of warnings that it would result in a widening of the advice gap.
Some claimed that with commission being removed under the rules – which took effect at the end of 2012 – advisers would leave the industry and firms would raise their fees in order to comply with the new requirements. In the event, advice numbers have remained largely steady, according to the Financial Conduct Authority’s (FCA’s) 2020 evaluation of the RDR, which revealed that adviser numbers had risen between 2012 and 2019.
But fears that the advice gap would open up further may not have been wide of the mark. Our latest research among advisers found that almost three quarters (73%) of believe the advice gap has widened in the past five years, with more than half describing it as “a lot wider”.
Price pressures
There are several reasons why the advice gap has widened. One is the cost of advice, particularly if it’s not perceived as an essential outgoing during the present time of high inflation and significant belt tightening. OpenMoney’s 2021 Advice Gap report revealed that just one in 14 adults has paid for financial advice in the last two years, compared to one in ten in 2020. Of those that hadn’t paid for advice in the past two years, just 12% intended to do so in future, but one in eight would do so if the cost were lower.
From the adviser perspective, our research found that firms feel they are prevented from reaching out to more people that don’t typically access advice because the cost of servicing these clients is too high (46%), lack of time to service more clients (34%) and the added compliance burden (32%).
Encouraging signs
However, although more than six in ten (62%) of the advisers we surveyed said the advice gap had widened during the Covid-19 pandemic, more than a fifth (21%) said it hadn’t. This compared with just 13% who believed it hadn’t widened over the past five years.
This subtle shift may reflect the increased adoption of digital processes during a period when traditional face-to-face contact was curtailed. Even those once reluctant to use non-traditional methods of communication were given no option but to adapt during the pandemic, and many may have been surprised by the benefits.
Many advisers already understood that automated processes could help them work more efficiently and focus more on their clients than on admin. We’ve seen increased use in recent years of client facing technology like client portals, as well as software including automated suitability reports and asset allocation tools.
Technology such as videoconferencing ensured that advisers and clients could continue working and meeting during the pandemic, while there was a marked increase more generally in the use of digital services such as banking apps (the use of which jumped 72% in Europe during the first stages of the pandemic).
Greater use of digital methods has been driven largely by client need, but firms have also reaped the rewards, judging by the most recent intelliflo eAdviser Index (which measures customers’ business metrics against their use of intelliflo office). The Index found that ‘Champions’ – firms maximising their use of technology – generated 44% more revenue and 59% more ongoing revenue per adviser and have 28% more clients and 48% more assets under advice than ‘Explorers’ (firms not yet fully using all available functionality).
This reinforces findings in the FCA’s RDR evaluation, which reported that one firm had found using technology “properly” had reduced the time taken to prepare an ongoing review from six hours to just 45 minutes. Another firm said that advisers fully adopting technology had posted twice as much revenue.
Bridging the gap
If firms can reduce costs, enhance efficiencies and generate significantly more revenue by maximising the benefits of the technology available to them, that creates the capacity to serve a wider range of clients. This will sometimes involve taking a ‘hybrid advice’ approach, where clients with less complex needs are serviced primarily through digital channels. This is typically a flexible model in which some clients use technology to engage with their finances independently while others prefer to maintain a higher level of adviser interaction and input.
The potential for technology to help reduce the advice gap is recognised by the advisers we surveyed. Asked for the top three things that would help the industry reach more people that don’t typically access advice, 54% cited more widespread use of technology by advice firms and 41% said more widespread use of technology by clients. In all, 95% said they believed that technology would help narrow the advice gap.
There are clearly several different factors that help perpetuate the advice gap, including public awareness of advice, mixed perceptions as to its value and a number of reputational and regulatory issues. But there’s no doubting that as work towards closing that gap continues, technology has a big part to play.
