As the world has evolved, so has our understanding of how financial strategies can help people achieve their goals. Budgeting, investment and responsible borrowing are just some of the strategies we use to grow wealth, and it seems more accessible than ever as digital innovation surges.
Why, then, are we seeing a widening in the financial advice gap across the globe?
What is the financial advice gap?
Financial advice is any kind of help with the planning of individual life circumstances; preparing for retirement, saving for a rainy day, tax planning, and perhaps the most important of all – how to invest in order to grow wealth.
The ‘advice gap’ then refers to the disparity between people who have access to this financial aid and to those who either can’t afford or access financial advice.
A survey by OpenMoney UK shows a sharp increase in this gap every year. More people are finding financial advice unaffordable and even more are unaware of available financial advice:
- The “free advice” gap refers to those who could benefit from advice but are unaware it exists – is estimated to have risen to 20.8 million.
- The “affordable advice” gap which refers to those who could benefit from advice but can’t afford it – is estimated at 5.3 million.
Financial illiteracy is a huge issue
It’s clear that too many adults aren’t making financially-sound plans or investing for their future.
OpenMoney (2020) reveals that about 44% of adults had run out of money before their next pay at least once in the past year and only 24% of adults save every time they get paid. Whether exacerbated by the COVID-19 disaster or not, it’s abundantly clear that many lack the financial knowledge and capacity to weather another economic crisis.
And it’s not as if financial services are unavailable to the public – numerous financial advisors exist, which can generally be categorised into the following:
- Fee-based and commercial-based advisors: individuals or groups typically referred to as “financial planners” who take a fee for financial guidance and management.
- Robo Advisors: digital wealth management platforms that automate the process of investing and managing money on your behalf – powered by algorithms, with little to no human supervision.
So why does the financial gap still exist?
When asked about seeking financial advice, many adults revealed that they:
Were simply unaware
Many didn’t know of existing financial advisors or where to look.
Think it is unaffordable
A recurring consensus was that many financial services were exclusive to the wealthy or simply too expensive.
Believe it’s unnecessary
They trust their ability to manage their own money and believe they “shouldn’t have to pay for something they can google”.
Distrust conventional advisors
Possibly the biggest reason – many believe financial advisors are untrustworthy and only wish to “sell you something” out of self-interest.
Digital wealth managers may be the answer
Robo-advisors are digital, algorithm-driven financial advisors that can help provide adequate, affordable and unbiased financial planning to solve many of issues driving the advice gap:
The selling point of most robo-advisors is that they require low starting capital (some from as low as $100) and minimums which makes financial advice more accessible and affordable to the general public.
- Advice is automated
Based on your risk-appetite, robo-advisors assess your information through a survey to offer advice and tailor a suitable portfolio which automatically invests your money digitally. This means little to no human intervention, removing the element of distrust people may have in conventional advisors.
- Can be recommended by conventional financial advisors
By incorporating both a hands-on approach with robo advisory, financial advisors can offer an even more comprehensive, accessible and personalised financial plan for clients; this could help onboard clients who may previously not have the means for financial services.
The potential for Robo-advisors to start closing the financial advice gap isn’t just promising for budding investors. Financial advisors can use this strategy to bring affordable, diversified investing and essential financial advice to an untapped market, creating new opportunities that were previously too expensive and time-consuming to pursue. These opportunities aren’t necessarily short-term, either: financial advisors can reach first-time investors and potentially turn them into long-term clients, capitalising on the scalability of robo-advisors.