The ready-made bank of customers demanding advice makes the workplace the ideal breeding ground for digital propositions, says F&TRC director Ian McKenna
Few parts of the financial services industry are better placed than corporate advice firms to capitalise on the opportunity offered by digital advice. Recent YouGov research identified that 30 per cent of UK consumers would rather manage their finances via an online service than speak to a financial adviser.
I have recently spent considerable time looking at how to construct a robust business case for this sort of new online advice proposition. The numbers make compelling reading.
The same YouGov study found that 23 per cent of consumers would be happy to pay just over £100 for such a service. For most corporate firms, 23 per cent of the members of the workplace scheme they have put in place paying £100 per year for a streamlined digital advice service would represent an attractive income stream, especially if they could buy in much of the necessary service from a technology supplier on a wholesale basis.
These numbers will work even for smaller advice practices. For larger firms that can achieve scale, significant advances are also being made in ways they can create their own unitised default funds. The ability to rent other components to assemble their own vertical proposition presents huge opportunities. It is increasingly clear how, unencumbered by the cost of legacy operations, large advice firms could deliver better member outcomes than might be possible with traditional pension providers.
There is no shortage of start-up digital advice propositions being developed for the UK market – the long awaited iTunes moment for financial advice is clearly approaching. However, one of the major barriers to start-ups in this area is the cost of attracting new customers.
It is generally accepted that this can run to well over £500 per customer. Some say it could be double that figure. If customer acquisition costs represent five to 10 years’ revenue, achieving profitability will be challenging. Conversely, if you have a pool of existing customers with whom you have had to engage for their auto-enrolment process, this presents a good base for building a relationship. The corporate arena provides a markedly different opportunity for digital advice solutions from that offered by the individual advice market.
By the end of February, employers accounting for over 21.6 million employees had reached their staging date. The YouGov research suggests therefore that around 6.5 million consumers would be willing to pay £100 a year for digital pension advice. Even a fraction of this would represent a golden opportunity for advice firms to deliver services for which there is real demand.
A recent study by the DWP identified that nearly half of all employers – 44 per cent – had taken advice when arranging their AE scheme. With pensions minister Ros Altmann now raising concerns about employers receiving advice from unqualified people, it is reasonable to assume we will see an increased focus on who is allowed to give that advice. This can only strengthen qualified adviser firms’ position.
I frequently hear large advice firms say they are reluctant to deploy digital services because their advisers will be uncomfortable. In building services for AE customers, firms are not cannibalising their existing business nor the work their current advisers conduct.
The YouGov study shows that 59 per cent of consumers would prefer face-to-face advice, although this raises the question of whether they can afford it. The audience for this service are people who have no intention of using a financial adviser but want to receive their advice in different ways. That said, following the recently unveiled recommendations of the FAMR, we could see investors able to tap into their pension pot to pay for advice.
In delivering a low-cost digital service, corporate firms can build new income streams that can significantly grow the capital value of their business. The p/e ratios of digital companies are typically far higher than those of companies in the old economy.
Some firms will doubtless choose to continue without altering their operating model. But for those that want to maximise the value of their company, building a business plan to capitalise on this opportunity should be seen as a priority.