What exactly is the advice gap, and how do we solve it? This week, Dani and Ned chat about issues surrounding the advice gap with returning guest Sam Beeby.
The advice gap is the difference between people who would benefit from some form of financial advice and those who can access and pay for it. Breaking down this definition, Sam first explains what constitutes financial advice. Financial advice refers to any help towards planning for individual life circumstances. This includes insurance, savings, tax planning, and investing. Sam highlights the point of investing as pivotal as he believes that the key to growing wealth over a lifetime is through investments.
At its core, the advice gap tells us that the people who need the most advice cannot access it. What is striking beyond this point is the concept of an affordable advice gap. This refers to those who are able, willing, and happy to spend on financial advice, but they find it too expensive. Six million people in the UK experience this affordable advice gap and would pay for financial advice if it costs a bit less. Historically, financial advice has been expensive across various models, putting it just out of reach of many. Furthermore, another reason for the advice gap is regarding perception and access. Trust is a crucial component of financial management, and it is difficult to ascertain whether a financial advisor is trustworthy.
These issues can be remedied through technology and digital platforms. However, this digital revolution in wealth management has not happened as quickly as we might, and the advice gap persists. One reason is that Robo-advisors and digital wealth products are yet able to offer holistic lifetime advice. Currently, a large part of those who use Robo-advisors are clients already confident enough to make DIY investments. Thus, Robo-advisory is not capturing new demographics of people who are less confident in what to do and require more help. While we might not be there yet, the industry will continue to progress as the problems with digital wealth management are being ironed out, and new business models emerge. Eventually, the gulf that exists between planning advice and comprehensive guidance will be bridged with the latest technology.
While this evolution occurs, Sam recommends that financial institutions take on a hybrid approach. A hybrid model consists of a digital proposition with a human advisor. This model is the best at building trust with technology. Since we have not gotten to the stage where everyone is comfortable trusting a Robo-advisor, the human touch is still necessary. Thus, organisations that can provide this spectrum of financial services should be doing so. For digital-only players, the key thing now is to equip digital solutions better to provide advice. Setting up a goals-based platform is a good way of doing this. Framing the investment journey simply in terms of life goals will give the novice investor a framework to consider what is important and take steps towards achieving that goal.
