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How Can Financial Advisers Capture the ‘Missing Middle’?

The challenges surrounding current financial advice models are driving customers away, resulting in fewer people seeking financial advice.

The challenges are well known and include high costs; a reputation tarnished by recent scandals and adverse media coverage; cumbersome, time-consuming processes and lack of information; and limited integration across banking, insurance, wealth and personal financial management, resulting in a siloed and narrow focus of advice.

In addition, regulatory scrutiny of the sector has increased and while it is trying to uplift the reputation of the sector, it is resulting in an increase in cost and compliance for advisers, and partly exacerbating the above customer-facing challenges.

Robo vs Face-to-face Advice

Robo-advice has been spoken about as the “solution” for many years, but has struggled to wrestle market share away from the traditional face-to-face advice channels. Some of the pioneers in this field, such as Wealthfront and Betterment in U.S., and Nutmeg in UK, have experienced rapid growth, but collectively they only account for a small fraction of the market.

One argument is that robo-players are focusing on a new customer segment—self-directed individuals (often, but not always, the millennials)—who are looking for low cost investment options and not in need of face-to-face financial advice.

While the growth potential of this segment is uncertain, it hasn’t prevented investment in this space by incumbents and the emergence of a significant number of new players seeking to disrupt the status quo.

Conversely, the traditional face-to-face financial advice models are viewed as being focused on those with more complex needs and the means to pay for financial advice costs. Estimates vary, but it is believed that 15-25 percent of the adult population in Australia use a financial adviser.

Players may disagree on the future growth potential of both the segments (robo and face-to-face). However, there is consensus among wealth managers that there is a reasonably large “missing middle” segment that would seek financial advice provided the right proposition could be developed, at a lower cost and delivered in a hassle-free manner.

The ‘missing middle’ would seek financial advice if a lower-cost and hassle-free proposition were developed.

Global Perspectives: Is Anyone Winning?

Almost every large wealth manager is focusing on developing some version of a digital or hybrid advice solution. There are very early signs of success through some of the large players in the U.S., who are developing “bionic models” that marry the best of technology but retain the key human elements to provide financial advice. The most successful model to date is Vanguard Personal Advisor Services that has accumulated $A65 billion ($51.9 billion) assets under management (AUM) just two years after launching.

They offer a goals-focused, self-guided, online tool that provides personal, human-led planning and investments in a consistent, digitally powered and mobile friendly way. The digital portal is supported by 500 salaried advisers who are either already certified financial planners or in the process of becoming one.
Charles Schwab’s recently announced Intelligent adviser services aims take this one step further and offers face-to-face meeting with the adviser as part of its proposition and more frequent access by video and over the phone.

The most compelling component of both these players’ offerings are the relatively low costs for provision of financial advice, with Vanguard charging $1,000 for less than $50,000 assets under management (AUM) and only $250 for $50,000 to $500,000 AUM. What is also interesting about both these players is that the majority of their customers (existing and target) are 50 or older, rather than millennials/ younger segments that are often associated with robo-like offerings.

Many of the incumbents with large adviser bases/ relationships such as UBS are focusing on reducing the cost to serve through focus on wide-scale automation of as many activities across the advice process as possible. Relatedly, players are also focusing on using data analytics to enhance adviser productivity.
Several of these players benefit from structural advantages of being large, having a sizable customer base and operating in markets that are materially larger than the Australian market.

These players and others like them have had some early success and while questions will remain about how sustainable they are over the long-term, they do provide some lessons for Australian players to consider.

Considerations for Players in Australia

Despite the structural advantages in many other markets, there are four key considerations for Australian wealth managers as they go about developing similar offerings:

1. Clarity in ambition. Organizations, especially those in manufacturing need to clearly articulate their future ambition around provision of financial advice, especially around:

  • Which customer segments are they targeting?
  • How will advice be provided to each segment?
  • What is their role versus those of external parties (for example, Independent Financial Advisers (IFAs))?

The ambition statements need to carefully consider elements that can directly be controlled by the organization (such as, development of propositions) versus those that can’t/ shouldn’t (for instance, IFA behavior) and go well beyond motherhood statements like ‘omni-channel’ and ‘goals-based’.

2. Seize the opportunity and contestable landscape. Be ruthless in determining the financial size of the opportunity across each customer segment and split across products, platforms and financial advice (planners and dealer groups).

  1. Be clear on source of competitive advantage. Critically challenge yourself to identify own source of competitive advantage versus the rest of the market. The more visible and tangible this is, the easier it is to monetize.
  2. Be honest about ability to deliver. Many organizations have run an “Advice transformation” program that has not yet delivered the benefits that were anticipated. For some, lack of clarity on the first three points has contributed to this.

Irrespective of that, the reality is that developing a compelling offering at a materially lower cost for a new customer segment not only requires investment in technology but driving fundamental change within an organization, in customer engagement and adviser behavior.

The above is extremely challenging for most organizations and they should look to augment existing capabilities with appropriate partners to de-risk execution.

Financial advice models will continue to evolve. In the future “bionic models” will be the norm. Equally, it is also clear that the development of these models is challenging and requires considered thought.

Players that can take a disciplined approach towards the development of these models not only stand to benefit financially, but also provide peace of mind to millions of consumers across the region.

A version of this piece first appeared on the Actuaries Digital website.

Angat Sandhu

Partner at Oliver Wyman, Financial Services Practice

Angat Sandhu is a partner in Oliver Wyman’s Financial Services Practice and leads their Asia Pacific Insurance Practice. Prior to joining Oliver Wyman, Sandhu worked at Macquarie Group and Towers Watson. He is an actuary, a holder of the right to use the Chartered Financial Analyst® designation and the Financial Risk Manager designation.

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