A phrase we seem to hear all the time these days is ‘There’s an app for that.’ It has led many people, armed with no more than their mobile phone, to learn a foreign language, diagnose illness and, in some cases, to build a financial plan on a do-it-yourself basis.
That may not be a bad thing. More people taking control of their finances and taking a vested interest is better than disengagement. But it does present a challenge for advisers. In an age when clients may be more willing to trust an app-based algorithm than a person, how can face-to-face advice compete?
The first thing to recognise is that, no matter what computing power a piece of software possesses, it is only as good as the information that it is given. It cannot measure whether the user that hesitantly selects ‘adventurous’ for their risk appetite really appreciates what that means. When it comes to making complex personal finance decisions, understanding the analogue side of human nature is an important filter, even in a digital world.
So the first stage where the adviser can add value is in ensuring, when technology is used in the planning process, the input phase is conducted with care and without bias. Without the right input there is no chance of the number-crunching tools providing the right output.
The adviser plays a key role in providing an impartial, detached assessment of the realistic assumptions upon which financial projections can be built. We know from our own research this is something that even the most confident consumers find difficult to do themselves.
Self-investors are much more inclined to underestimate the investment risk they’re taking on, for instance. That in turn makes it near impossible for them to dispassionately assess how their investments may fare in a downturn.
Online tools allowing customers to trade at the touch of a button can do as much to promote bad investment behaviours
This takes us to the implementation phase of the financial plan. As well as being at risk of making false assumptions when using tech to build financial projections, consumers are also at risk of failing to act on those findings appropriately.
Research into investor behaviour shows not only that DIY investors are likely to take on more risk than they realise, but that they are also prone to panic selling when the market dips. That combination of a lack of awareness of investment risk and a tendency to sell when markets test their patience is a potentially toxic mix.
We also know that self-investors are prone to over-trading, and often have an exclusively UK bias to their holdings. It means online investment tools allowing customers to trade at the touch of a button can do as much to promote bad investment behaviours as they do good.
The adviser plays a key role here as a behavioural coach, ensuring that, while the customer has the opportunity to engage with their portfolio online, they also understand the dangers of their own investment impulses.
We know that advisers can play a crucial part in helping customers with impartial assessment of their individual needs and ensuring they avoid their own dangerous impulses when self-investing. But perhaps the biggest driver of value, which is largely overlooked by online investing tools, is selecting the right tax structure. Online fund selection tools can guide the user to an Isa or pension, but that doesn’t get to the nitty-gritty of how clients can best hold assets for the optimal outcome.
Understanding the individual’s unique position, utilising existing provisions, ensuring assets are held in the most appropriate way and under the most efficient tax shelter: these are the factors that underpin good financial advice, yet these are the elements that DIY investors find hardest to do properly.
Sharing allowances between partners, placing assets in trust or utilizing capital gains harvesting are complex tax planning tools likely to be under-used or completely neglected by DIY planners.
Lastly, digital comparison tools put non-advised customers at risk of putting price ahead of value. Where mortgages and protection are concerned, for example, product searches are likely to draw customers immediately to the lowest-cost product. This inevitably creates a race to the bottom, with providers competing on price rather than quality.
Advisers play a crucial role, both by helping broker a good value price point but also by ensuring the features of each solution are fully understood and meet the needs of the individual.
Digitisation in financial services presents a number of opportunities for advisers to leverage scale in their business, enhance the client experience and simplify processes, and as such should be welcomed.
But it also presents a threat: if consumers believe that financial advice isn’t for them or do not understand the difference it will make, they may be persuaded that an app could do it for them at lower cost and with the same outcome.
That’s why we have to ensure that, as an industry, we can explain why human intervention is still so important. I have often heard advisers and industry members say it’s impossible to pinpoint the value that an adviser adds. That’s rhetoric we need to move away from. As an industry we need to do more to bring that value to life.
We must articulate the value we add. Otherwise, how do we expect anyone to put their hand in their pocket to pay for it?
Andy Thompson is chief executive of Quilter Financial Planning