In this guest article, Adam Price, founder of VouchedFor.co.uk, reviews the new wave of start-ups looking to shape the evolution of online financial advice.
There has already been much written about what effect the Retail Distribution Review might have on the investment and pension market.
The abolition of commission and the introduction of advisory fees is thought likely to cause the IFA1 sector to shrink. Fearing the impact on sales, life companies, wrap platforms and asset managers are expected to launch numerous ‘direct-to-consumer’ offerings.
The question is, what will the next generation of direct offerings look like, and will they engage, educate and inspire the average ‘mass affluent’ consumer?
Consumers are today presented with a bi-polar choice. They can either take matters entirely into their own hands, spending significant time (months?) learning about investments before visiting an online brokerage (as many readers of Monevator will do), or they can delegate everything to a financial adviser who they meet maybe once per year.
For the average consumer, who is used to fast, efficient and engaging online solutions, neither prospect is particularly appealing.
Online financial advice start-ups
Perhaps the best indication of what the future has in store for internet-savvy consumers comes from the new wave of tech-based start-ups.
The approach these companies take to online financial advice falls into three categories:
- The Virtual Adviser – Online tools that seek to replicate what financial advisers do today. Discover, educate and advise.
- The Remote Adviser – Leveraging technology to connect financial adviser and client, regardless of location.
- The Social Adviser – Crafting online communities capable of educating and advising one another.
1. The Virtual Adviser
“Could technology replace advisers?” is a question I’ve heard a few times. The idea is that an online financial advice service could:
- Aggregate your finances from various sources
- Take you through a fact-finding questionnaire
- Algorithmically design a portfolio that fits your attitude to risk and cash flow requirements
- Execute that portfolio for you (likely using low-cost ETFs)
- Monitor and rebalance it as time goes
PersonalCapital.com has recently launched in US, with Bill Harris (former CEO of PayPal and Intuit) as its CEO and with $24m of Venture Capital funding. It is the most credible offering I’ve seen that pretty much promises to do all of the above. That said, it also comes with a human adviser for a 1% p.a. fee.
Similar propositions include Betterment in US and RPlan (currently in private beta) in the UK.
Will they replace advisers? I don’t believe so, even on a ten-year timeframe.
Instead, I could imagine in ten years’ time financial advisers being called upon by a broader base of people, but with more specific and advanced advisory requirements.
With adviser and client both having access to the same platform, different clients would bring advisers into their ‘journey’ at different stages, depending on their individual need.
2. The Remote Adviser
In the view of the future I just outlined, I see financial adviser quality and niche-specialism becoming more important than geographic proximity to the client.
This will no doubt be aided by online video conferencing and co-browsing technologies. Indeed one start-up, Virtual Advisor, has already designed such a technology, which overcomes the regulatory challenges associated with distance-selling of financial products.
This leads me to my own category of start-up. VouchedFor.co.uk along with Brightscope in US and AccretiveAdvisor in Canada, all promise to help consumers find the right financial adviser for them.
VouchedFor takes a Trip Advisor user-review approach to comparison, while Brightscope takes a MoneySupermarket-style data-based approach, and AccretiveAdvisor takes a Match.com profile-matching approach.
Today, these websites promise to offer those seeking an adviser a better route than the Yellow Pages or similar. In my longer term view of the future, I can see such models becoming the market place for consumers seeking specialised advisers who can connect with them and their portfolios online.
3. The Social Adviser
Increasingly, individuals are turning to blogs and forums for financial advice.
It scares me how many people post “what should I do with the £500k I just inherited?” on MoneySavingExpert! Fortunately, somewhere among the answers is usually some sensible advice.
What these communities typically lack though is a ‘financial graph’. With Facebook and Twitter, we know who we’re listening to – defined by either their ‘social graph’ or ‘interest graph’ respectively. If I were to take financial advice from an online community, I’d want to be connected with people of similar financial situations, goals, attitudes (such as passive vs active), as well as to be confident of their credentials (if any).
Covestor (US) is an interesting start-up. It allows you to see different individuals’ investment portfolios, and their performance. When you see one you like, you can follow it – i.e. set your portfolio to replicate theirs. In so doing, a small fee in effect flows from you to them. At its extreme, the concept threatens to do to fund managers what Zopa (peer-to-peer lending) threatens to do to banks.
A very different social advice concept is Lovemoney. This site enables you to form groups based on financial goals (e.g. pay off the mortgage, or retire early) and share experiences.
Rplan (mentioned above) also promises to leverage this concept. Once you have set up your portfolio, they then plan to connect you with similar investors and relevant experts.
None of these is yet the Facebook of Finance, but nonetheless it is an interesting space to watch.
To wrap up…
I’ve painted here a picture of how I see technology shaping the future of financial advice. Like any prediction, I can at best hope that I’m directionally correct albeit precisely wrong.
My intent is to help stimulate the debate. Whatever form it comes in, I’m convinced this market is ripe for technology-led disruption.
No mention in this article of any online financial advice product or service should be taken as an endorsement by Monevator – it’s early days for most of them, so please do your own research. For more from Adam, follow him on Twitter (@VouchedFor).
- IFA is an acronym for Independent Financial Adviser [↩]
The personal finace world is about to become a truly dangeorus place.
We humans are frail and fearful in general, and have a dreadful tendency to run with the herd, and to refuse to believe the evidence of our own experience. It is hard enough to try and fight that, demanding eternal vigilance and self-doubt – if you think you know something, you probably don’t unless you can test it .
That herd-following tendency sounds like it is about to get magnified enourmously by technology. Facebook is already a horrible interface that emphasises the detail and the here-and-now against overview, reflectiveness and situational awareness. The same applies to social media in general, style and trend triumphing over substance.
We are about to develop amplifiers for irrational exuberance, and its evil twin, apocalyptic exuberance. It’s going to be a rough ride, and to pinch a phrase from Hunter S Thompson, good men’s money will die like dogs.
@ermine — It’s true that these new technologies come with risks, and your point on amplification is a pertinent one. However as a long-time critic of the financial services industry, I think we shouldn’t overlook the other key thing Internet technologies usually bring to the table — transparency.
If the Internet can bring the same harsh light of truth to financial services as it’s done for numerous other markets — aided by social technologies and so forth — then I’m all for it.
To be honest, I can’t see how it can be much worse than than the old model of ‘phone an IFA from the phone book cold and get stuck into a product on the basis of the trail commission to the IFA’ that reigned in the past.
Still, that world is going to come to an end with the RDR, so we shouldn’t reopen that can of worms here again — indeed, I hope this piece is a constructive olive branch to the ‘good guys’ of the IFA world about how we can make things better in future.
Interesting list of money advisors, have you seen/read http://www.cii.co.uk/downloaddata/HurmanListeningtoConsumers270808.pdf that talks about Gurus, coaches and personal shoppers.
I think that what a lot the IFA miss is the ‘financial skeleton’ that starts with ‘spend less than you earn’, budget for now and the future. I am feed up with the ‘insurance’ industry saying ‘what if this bad thing happened’ how would you cope? their answer is buy this X insurance. Same for mortgages and investment funds. how many cheap index trackers are there out there? Trying to find them is a challenge. Look at the Junior ISA I was just sent info from ‘Jump’ after digging past the £25 voucher and guff it is going into ‘Witan Investment Trust’ which is global and looks like any other big fund that will take my money and their commission and run.
Back to the ‘financial skeleton’ you need to be saving a little each month for the future into low fee index trackers, and adjust the asset allocation as time goes on. As there is no point in worrying about the ups and downs of the markets.
Advisors always appear to have a ‘conflict of interests’ and ‘secondary gain’ so can not be independent of the fees/commission they get.
How do make money at it ‘lovemoney’ and ‘moneydashboard’ look like they are making a go of it.
You can compare yourself with the ‘office of National Stats’ to see what Mr average is doing. And go to the http://www.moneyadviceservice.org.uk to see how the UK government is spending it £43.7 million of funding in educating Jo public about money.
I think there is a place for a financial-support-groups like on fool, lovemoney and MSE, but even more niche as there are so many different situations, just list the categories of a budget, do what works for you.
Kind regards
Giles
1. Thanks, Adam, for a fascinating article.
2. I hadn’t seen Covestor before – a clever idea there. However, I feel it must be only the start: here there are many possible business models.
Apologies for going off topic but would anyone here like to do a Graham type analysis of Groupon?
http://www.bbc.co.uk/news/business-15574954
I’ve just read one of the Zweig chapters toward the end of II where he’s analysing some tech companies from the early noughties
The article above seemed to show remarkable similarities in the figures.
I should probably have a go at it really…
@Giles — Interesting comments. And I really do agree on the hiding the cheap products front. I got annoyed with a friend who told me she couldn’t find the cheap HSBC index tracker I’d suggested she invest into — until I went to look for it the other day!
And all the terms are second nature to me… for someone to whom ‘FTSE All-Share index fund’ doesn’t sound that different to ‘FTSE All-Share Managed Fund’ or similar it’s a nightmare.
I think MSE comes under the the Social Advisor category of this Monevator post and I do think there is room for growth in this area particularly for minority based personal finance online communities. In addition to Monevator, I read a blog called Seek Wisdom, Find Wealth which is for women of colour. I think there are niches like this which can be exploited so everyone can be serviced however the downside of online financial communities is they can be so overpowering (MSE is guilty of this with the borderline psychotic deletion of threads etc) which is why I am more at home at places like here because while social financial advice is great, what is the point if the atmosphere becomes nasty?
Interesting take. I have a on-line valuation site. This is a dated piece of analysis now – but something you might find interesting:
http://blog.valuecruncher.com/2009/09/a-future-of-on-line-finance-from-brokers-to-blogs-to-yahoo/
Enjoy…
Fascinating piece – and a wake-up call to the whole sector. However, when faced with enormous financial decisions, do you really make a decision based on a few reactions to a forum post on money saving forums? Much as I see the landscape changing over the next few years, and much as I see us having to keep up, a good old face-to-face discussion with a qualified, learned professional with many years’ experience in investments and wealth management will always prove more authentic and more useful. Perhaps technology can just bring them closer to realising this!
I can agree that a shrinking of the IFA market is going to be a trend. As an IFA Wolverhampton I’m always interested in IFA trends. I spoke last week to a German IFA from Cologne who is quite nervous. He says there are over 300k IFA’s in Germany and that the plan is for there to be only 150k IFA’s in 12 months time. Now that’s a big shift.
Online advice and support is definitely a growing way forward for many, but to be straight and direct you can never replace the depth and essentialness of a face-to-face meeting with a highly skilled and knowledgable IFA.
Legislation and products change so much so often it’s tough for IFA’s to keep up let alone the general public. Everyone’s circumstances are very personal and individual and it takes great skill to match that up to the whole range of options and products in the market place.
Online is a good starting place, but it can not be the final destination. Always seek out to understand the mistakes that people fall into. A useful guide and insight into this can be found on my website.
Due diligence in life is important.
[NOTE FROM BLOG OWNER: This comment was lightly edited to remove direct links to the comment writer’s website. If you’re the author and would rather I deleted the comment, please let me know].