In our recent report, “The next frontier”, we detailed our views on where automated financial advice - more commonly known as ‘robo advice’ - could spread beyond investments. In this article we take a closer look at simple financial planning – i.e. financial decisions that can be made based on short advice processes, such as choosing between investing in an ISA and paying down debt. To form our views we undertook interviews with experts, key players and start-ups, as well as a survey of over 2,000 consumers.
Our key findings
- When it comes to planning one’s financial future, our research indicates that up to 12 million people would like help from a robo-adviser1.
- 34 per cent of our survey respondents said they would pay for this help. We view this figure as high because engagement in financial planning among the general population is low and people can be unsure of new, online services.
- Millennials want it the most. Around half of the 18-24 age group in the survey would pay for robo-advice (see below). Why? Two factors come into play in our view. The first, well known, one is that overall millennials tend to be more inclined to try new technologies than older people. The second is that, for many young people, understanding their financial affairs is a struggle. Let’s take the recently launched lifetime ISA (LISA) for example. This tax-free wrapper is aimed at people aged under 40 and provides a state-funded 25 per cent top-up on savings up to £4,000 a year for home purchase or retirement. Yet, despite much marketing, in a recent poll, nearly half of young people incorrectly believed that LISAs are more generous tax wrappers than corporate pensions, which can offer up to 45 per cent tax relief and include employer contributions2.
Willingness to pay for automated advice for a financial review by age
- People will not pay much. While many people would pay for robo-advice, the other side of the coin is that the amounts they would pay are generally low. Seventy-two per cent in our survey wouldn’t spend £125 or more. This is equivalent to a 75 per cent discount on the typical cost of face-to-face advice.
The business case
So why would a provider offer robo-advice here if customers will not pay much for it? The answer lies beyond financial services. Many popular and profitable digital services, such as music streaming, have been built on a model where a provider gives a core online service away for free while charging some users for premium features.
In the world of financial advice, we believe a provider could make money on robo financial planning in three ways:
Charging for regulated advice as a premium feature, while offering free guidance, which is unregulated and therefore has significantly reduced compliance costs, as a core offering3 4. Customers could pay for an advised service through a small increase in charges in basis points. That way, younger people and those with small pots (who are likely to have simpler needs than others) would pay less than more affluent customers.
Charging third parties to advertise on the robo-advice platform.
Using free guidance as a way to build customer loyalty and upselling more complex, and regulated, financial products at a later stage. This last point is harder to quantify, but is nevertheless important. As mentioned above, young people are keenest for robo financial planning advice. Building loyalty among this group would have the highest pay off. Young customers are likely to have higher lifetime value than older customers. However, that value takes longer to materialise. This makes traditional business cases harder to justify.
The key players
Thinking about which players might get involved, three conclusions jump out:
Banks and pensions providers are best positioned to provide simple financial planning. They have unrivalled access to customers, which gives them a key advantage as it would be cheaper to market the product than for other players. Banks and pensions providers send emails to their customers and offers of robo advice could be added to these communications at low marginal costs – and possibly even personalised according to customer profiling.
Start-ups can excel in a B2B role. Start-ups have an impressive track record on innovation. They can be nimble due to their small size. In our view they may be best placed to develop the technology for a robo financial planner. First, an engaging customer interface would be needed to hold people’s attention. Second, clever algorithms would underpin the analysis and recommendations within the guidance and advice. As a result, teaming up with established players that have access to many customers could be a promising route to market for start-ups.
That said, certain Fintechs have bucked this trend and won significant numbers of customers. They tend to have to have a truly differentiated proposition that really appeals to their target demographic (in addition to an engaging interface). Equally, established player can be highly innovative.
Employers are a trusted partner. Employers play an important role in our financial lives – they pay our salaries and contribute to our pensions. This role gives them a platform on which to provide help with financial planning to employees. In theory this would work like other employee benefits and increase job satisfaction.
So far robo advisers have focussed on wealth management. The next wave could start at the beginning – helping young people make better financial decisions earlier in life.
Total sample size was 2046 adults. Fieldwork was undertaken between 23rd - 24th January 2017. The survey was carried out online. The figures have been weighted and are representative of all GB adults (aged 18+).
1A website that provides low cost, automated advice on how to plan for the future and meet one’s financial goals.
3Regulated advice - Advice given to a person on the merits of taking a specific action (e.g. buying, selling) in relation to a specific financial product
4Guidance - The provision of information, generic advice on what types of product may be suitable and/or a general recommendation supporting customers in making their own decisions which does not (in and of itself) involve a personal recommendation