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:

1. The Virtual Adviser – Online tools that seek to replicate what financial advisers do today. Discover, educate and advise.
2. The Remote Adviser – Leveraging technology to connect financial adviser and client, regardless of location.
3. 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).

1. IFA is an acronym for Independent Financial Adviser [↩]

The question we’re most often asked in our guise as passive investing nerds is: “Should I buy index funds or Exchange Traded Funds (ETFs) as my tracker vehicle of choice?”

A quick recap:

• An index fund is a unit trust (or OEIC) whose portfolio is designed to track the return from a particular market index.

• An ETF is a security that is again designed to track the return from a particular index. ETFs trade on stock markets like any other share, and their price moves up and down during the trading day.

So are there different situations – or types of investor – for whom an index fund trumps an ETF, or vice versa?

This isn’t new territory for Monevator. We’ve looked before at the differences between ETFs and index funds. We’ve even done a huge multi-part guide to buying the best index tracker on a fund-by-fund basis.

However we’re now going to break it down into a bite-sized battle of the trackers.

Over a half-a-dozen small posts, we’ll look at each of the aspects you need to consider in your quest to find the best funds for you.

We’ll start by explaining why you should buy index funds if simplicity is your most important consideration!

Index funds are simpler than ETFs

If simplicity is paramount to your investing life then index funds are the way to go.

Like the mortice lock or the four-legged chair, index funds are straightforward products that do a good job and aren’t subject to the constant product innovation and morphing that can make ETFs something of a minefield .

Index funds have been available since 1975 with nary a whiff of financial scandal that entire time.

With index funds you can skip complications that affect ETFs like:

• Synthetic index replication that exposes you to counterparty risk.

• NAV premiums and discounts that affect cost calculations.

• Wide bid-offer spreads that make illiquid ETFs more costly.

• Dealing fees (unless you choose Vanguard funds).

• Using limit orders to control your buy/sell price.

You don’t need to understand any of that with index funds, and you can buy index funds cheaply through a fund supermarket or online broker.

Part two: Which vehicle is best when it comes to cheaper costs?

Take it steady,

The Accumulator

Great articles to invest some of your time in.

You can’t keep up with the soaring pay of Britain’s fat cats. By 3am Friday I had only half-finished an article on income inequality, so I posted my photos of the St Paul’s protests and parked my chin-stroking for next week.

But a week is a long time in executive pay bloat.

Later that very day, a new report thudded into our consciousness, weighed down by all the ink needed to print all the zeroes at the end of a FTSE 100 directors’ paycheck.

According to Income Data Services’ latest report – a steal for fat cats at £460 a pop but summarised by the BBC for the rest of us – the pay of directors of FTSE 100 businesses rose 50% over the past year.

This means earnings of almost £2.7 million for the average director of a FTSE 100 company! And these aren’t even the bosses we’re talking about here, just any old director. (Chief execs had to make do with a paltry 43% rise in a year).

As a result of the IDS report, the subject has had another thorough airing, and my little contribution is going to look as significant as the annual salary of a secretary that’s accidentally paid into the bank account of her blue chip boss – i.e. pretty much a rounding error.

So I won’t spoil my damp squib thunder by venting any more outrage now.

Instead, for more insight try Investors Chronicle economics editor Chris Dillow’s blog, where he points out that all the usual reasons for sky-high executive pay don’t cut it, and concludes:

Given all this, you might wonder what the real reason is for bosses’ high pay. Simple. Power. Bosses, generally, might not have the power to create super-efficient high-performing firms, but they do have the power to extract rents from shareholders and workers

Like some City traders, they must, in effect, be bribed not to plunder the firm’s assets.

From the point of view of shareholders, the small theft that is a multi-million  pay-packet is better than the large theft of wilful mismanagement.

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