The Advice Gap: It’s an efficiency and ambition gap constrained by price, trust and regulation
The Advice Gap report posted on July 3rd by the Lang Cat is a great read and the data presentation makes getting to grips with the key findings and opinion points very easy. https://thelangcat.co.uk/report/the-advice-gap-2024/. The points I am going to cherry-pick and explore are:
The number of people paying for advice has fallen from 11% to 9% in the past year despite the introduction of the FCA’s consumer duty.
80% of advisers believed the regulation has made it harder to service clients. This has impacted those with low investable assets, with 55% of advisers having stopped serving them. 20% of advisers said they would turn away a potential client who only had £20,000 to invest, with half saying they would only serve them under strict conditions, e.g., family groupings.
The ratio of clients per adviser was around 110, and when asked what the potential upper limit was, respondents thought this was around 150 to 160. (There was no significant variance across firm size, with larger firms tending to be more conservative.)
The takeaway that struck me out of kilter with the market opportunity was the scale of ambition of firms seizing the opportunity to service more clients. There is a raft of technology providers who have point solutions in the market right now that blow the doors off this perceived ceiling of only being able to increase capacity by around 50%. So why do firms think the potential is so limited? The question was posed to the wrong guys as the respondents lacked experience with the benefits of integration and automation to remove the administrative effort from the two critical journeys: client acquisition and review. If you don’t know what good looks like, it's not unreasonable that your expectations will be constrained by today's experience of outdated technology, operating models, and fear of the consequences of falling foul of regulation. It’s a guess in the dark.
Back in the 1880s, the top sustainable speed of a wagon was around 5mph, the constraining factor being the wheel design. Then, in 1888, John Dunlop brought pneumatic rubber tyres to the market. Over the next 20 years, the maximum sustainable speed increased to 25mph, a five-fold increase, the constraining factor became the horse, not the wheel. Introducing tyres sparked a raft of other innovations to suspension and wagon design that reduced the weight and increased the durability and comfort so that speeds were increased. Maybe if you asked a panel of wheelwrights back in 1888 what the potential for improving the speed was, they would have said 50%, assuming the rims and the leather axle bearings were expertly fitted. The analogy is over-simplistic, but it demonstrates the impact that disruption followed by successive waves of incremental innovation can have on a product and market that can't be anticipated by those anchored to the present.
I don’t buy into a meagre 50% improvement in adviser capacity being as good as it gets. David Stamp is a founder of Centology, which offers firms a fully integrated technology solution that can support adviser-to-client ratios in excess of 500 today. What the industry needs is a credible moonshot ambition. Simon Rogerson, the founder of the Octopus Group, believes that an adviser could serve 1000 clients. Watch this panel session for the context and narrative behind this argument: https://www.linkedin.com/events/adviserinnovationintheageofcons7204118936584384513/theater/
This is a radical viewpoint, and most involved in our industry will violently disagree, but the thrust of Simons’ argument is plausible if:
Advice firms are prepared to change their mindset, embrace scale and efficiency, and seek growth to bring the benefits of financial planning to a much wider market rather than a selected few.
Admin-heavy operating models and legacy technology platforms are reimagined to eliminate non-value-adding workloads and improve client engagement.
Cost-to-serve and client satisfaction/referrals become first amongst equals KPIs.
Pricing and propositional models must adapt to reach a broader market segment so that advice or guidance can be accessed via various channels depending on client circumstances and preferences.
The imminent Advice Guidance Boundary Review should help address some regulatory barriers preventing the broader take-up of affordable advice. There are two exam questions most investors seek answers to:
What proportion of my income should I save in my pension?
What proportion of my pension can I withdraw without being skint in later life?
If a less constraining regulation regime materialises technologies exist today for data aggregation and interpretation that remove the heavy lifting so that the answers to the above questions can be presented into scenarios that are easy to understand, leaving advisers to contextualise and explain the consequences of the recommendations rather than spend time gathering the data and performing the analysis. Their job will be engaging and nudging clients to act in their best interests and make decisions that, left to their own devices, wouldn’t be made. Arguably, this is the core purpose of financial advice. If the price point is no longer a significant barrier, more clients should be confident to seek financial advice.
The Advice Gap research indicated that 9% of the population paid for financial advice in the last two years and that firms are retrenching to focus on the population with enough investable assets to serve profitably. There is a perception that the ceiling on the upper limit of clients an adviser can serve is limited to a 50% increase. This perceived limit to the opportunity isn’t going to touch the sides in bridging the advice gap. Today’s firms either don’t know what good looks like or are happy running lifestyle businesses serving a relatively small number of clients. The challenge is to demonstrate and evidence the art of the possible and to create a narrative and roadmap for achieving what is considered unthinkable.