Mind the ‘financial advice’ gap

The UK finance sector faces a problem: how can it reach out to the 16 million savers currently stuck in the “financial advice gap”?

The gap affects those who would like to receive financial advice, but either find the services too expensive or have too little money to be worth an advisory service’s time, and was highlighted by the FCA as one of the biggest challenges for the UK financial market.

RDR Backfires

Whilst several factors have contributed to the problem, the gap has widened significantly since the introduction of the RDR three years ago. The RDR, a series of reforms designed to make financial advisory services more transparent and raise professional standards, requires financial advisers to charge customers for their services instead of using a commission-based model.

Whilst it may have ended conflicts of interest stemming from a commission-based model, it has also meant that advice is expensive and not always cost-effective, particularly if you’re seeking help in relation to smaller amounts of money or have simpler needs.

Expensive upfront costs

The bottom line is that the upfront costs charged by financial advisory services are just too high for most middle-income investors; according to the FCA’s findings, more than 85 per cent were not willing to pay more than £200 for online advice. And at the same time, many have too little funds to advisers are unwilling to advise those with limited assets, with 69 per cent reporting they had turned away potential clients in the past year.

The review also said the FCA should establish a unit to help firms develop automated services, lending weight to the growing number of “robo-advisers” hitting the market.

“Full-fat human advice is becoming a game for the more affluent,” said Mike Rogers, chief executive of insurance giant Liverpool Victoria, told the Guardian earlier this year.

“There is a lot of evidence that people are becoming more comfortable interacting with a computer for financial advice. They do not have to feel embarrassed. It is the only way that advice will be affordable for all.”

For Millenials, who make up a large proportion of those in the ‘financial advice gap”, robo-advisers maybe the future. The 2008 financial crisis, combined with a natural trust in technology that previous generations lack, makes them the target market for FinTech start-ups aiming to simplify investing.

Sites such as Nutmeg, Scalable Capital are revolutionising the way savers can access and act on financial advice; companies like these offering inexpensive, clear guidance may well be just what the sector needs.