Bridging the gap on financial advice

There’s no doubt the Retail Distribution Review (RDR) has improved the quality of the advice market. But the unintended rise in advisers’ business costs has discouraged some of them from taking on less wealthy clients – widening the advice gap.

The advice gap stands at roughly 35 million people, and is expected to rise further as the FCA’s new Consumer Duty regulation is embedded across the industry. Once again, increasing business costs for advisory firms and potentially pricing out many services for people with lower levels of wealth.

This is a sobering thought, considering four in ten people (41%) don’t want to pay for advice or can’t afford it, according to the AKG report.

Types of advice gaps

• The affordable advice gap – impacts those who are willing to pay for advice, but not at current prices.
• The free advice gap – consumers who want advice but simply cannot afford it. Or are unable to access free advice.
• The awareness or referral gap – those who are not aware that advice exists, or don’t know where to find it.
• The preventative advice gap – those who would benefit from having money advice as a preventative measure.

The last few years have highlighted the need for consumers to take more control of their finances. From a global pandemic, where lots of consumers were without the right protections and insurances, to a cost-of-living crisis where consumers’ assets aren’t working hard enough to keep up with runaway prices.

The AKG report highlights how one in three people (31%) that regretted not taking financial advice, said it was because they underestimated the impact of inflation.

Clearly there’s a necessity for development in the advice space. But whose responsibility is it? And, how can it be done?

The UK advice gap in numbers

Who’s responsible for the advice gap?

While no industry body is responsible for addressing the gap, there needs to be a joint effort between the regulators, and the industry, to improve the accessibility of advice.

One of the biggest barriers facing advisory firms in terms of innovation and solution-finding is the ambiguity around what’s considered advice and guidance.

More clarity on the difference between the two will open the door for advisors and investment platforms to create more bespoke solutions. Something for those who are looking for something at a halfway house between full-blown financial planning and guidance. This [RM1] will help bridge the gap for those in the ‘affordable advice gap’ and ‘free advice gap’.

Without that direction and clarity from the governments and regulators, firms are rightly hesitant about investing in the future of advice.

There’s no one-size-fits-all solution to narrowing the advice gap. Given the sheer size of the gap, it’s going to take time to create multiple initiatives to cater for different consumer types.

What role will technology play in bridging the advice gap?

Full automated or hybrid advice solutions have long been championed as the silver bullet to the problem. Technology advances in the form of Artificial Intelligence (AI) and other technologies, could see advice firms offer more cost-effective and simplified solutions, which are fully scalable.

Newer technology could also be used to stream-line the financial planning process – for example, annual reviews and investment process. In addition to reducing the advisers’ ‘cost to serve’ most clients, this’ll allow more time for advisers to focus on developing their proposition to provide more in-depth and bespoke services for those who want it.

How can outsourcing help advisers bridge the advice gap?

Another option to help address the gap is to outsource parts of the financial planning process to a third-party partner. By doing so, you save time and money. It also means your clients benefit from expertise from multiple firms, not just one, which will compliment your service and could act as a competitive advantage.

Ultimately, it allows advisers more time to focus on creating more value and better outcomes for clients by focusing on core activities – managing the direct relationships and making the business more scalable.

Read more: Why outsourcing improves advisers’ business models

Awareness campaigns

Ideally, people would be exposed to the benefits of advice as early as possible. Financial education to teenagers and young adults in schools, colleges, universities, and workplaces can help to spread awareness about financial advice and shape consumers attitudes towards money, and how they manage it.

Additionally, spreading the word around the free resource available to consumers, such as Money Helper and Citizens Advice. Encouraging consumers get to grips with their finances, no matter their size of pockets or life stage, can only be a good thing.

These awareness campaigns are particularly focused on addressing the ‘awareness and referral gap’ group, and the 3.12 million consumers who would pay for advice if trust could be improved – highlighting a huge opportunity for the industry.

To read more about the research on the advice gap, download the report from AKG on the future of financial advice.

AKG is a leading provider of information to the financial services community. The report is proudly sponsored by Charles Stanley.

Download the report