How the ‘advice continuum’ is changing the game

Three or four years ago, clients had two options: execution only; or full service financial advice.

Things are changing and we’re facing what I like to call the ‘advice continuum’; a term used to describe the spectrum of advice from a straightforward, execution only transaction at one end, to full wealth planning with discretionary elements at the other.

Guidance, targeted support and simplified advice are now all services available to consumers that sit beneath the banner of advice, and what a client needs is starting to dictate who – or what – serves them. Advice with a small ‘a’ is very fashionable.

Financial firms look set to split into two broad camps. Financial advisers will continue concentrating mostly on clients who need holistic advice; those with ample wealth or with complex tax questions or family situations that require an end-to-end, personalised service.

Larger institutions will move towards an à la carte advice model, where clients receive the service most relevant to them. Note who is doing the choosing here – sometimes the client, but more likely the institution. Is that a problem?

The regulatory default has long pushed firms towards holistic advice, with advisers traditionally working to get a full picture of their client’s personal circumstances before offering a recommendation.

That approach works well for clients whose wealth justifies the time it takes to build that picture, but not for the much larger group of people whose assets don’t justify the cost to serve.

Our attention must then turn to one of the biggest changes facing the advice sector: the reintroduction of the banks.

Banks have recently re-entered financial advice, with NatWest’s acquisition of Evelyn Partners the most notable example of this change. Targeted support, guidance and simplified advice have changed the economies of re-entering a market that many of them left years ago.

Following RDR, the risk of getting advice wrong simply outweighed the revenue on offer. Now the guardrails have moved, it’s once again commercially viable for banks to offer some sort of advice service.

It’s likely, therefore, that fewer people will end up receiving holistic advice than they do today. ‘Everyday millionaires’, those with wealth that clears a certain threshold and typically have more complex financial needs, will continue to benefit from full-service planning by an adviser.

For most people, however, holistic advice doesn’t make sense. They’re more likely to benefit from general, simplified advice or targeted support, often via a bank or large insurer.

A bank’s advice model is likely to look something like the hub-and-spoke structure we can see today in private banking, where a central ‘hub’ holds core functions like relationship managers, while a network of ‘spokes’ – specialist teams or product areas – connect to it for specific purposes.

That could mean a protection specialist for one need, a pensions specialist for another, and a relationship manager pulling it together, who is not necessarily regulated. It’s an efficient way to bring such a service to a much wider client base.

However, it only works if the technology and CRM behind it join up every touchpoint, so the most recent person to speak to the client understands the client’s full picture, every time.

That’s also where the regulator’s attention appears to be heading; matching the sophistication of a service to the sophistication of the client, and to the outcome required under the Consumer Duty.

Someone making a straightforward Isa and pension contribution needs a service proportionate to the size of that decision, not the full weight of a holistic review. Often clients may not know the right flavour of advice, so the banks need to answer that question. Should we expect future regulatory scrutiny in this area? Probably.

The trickier question is how large institutions can demonstrate they are meeting the Consumer Duty at scale. While advice firms typically serve a few hundred clients, banks operate in the millions.

So, how does a bank evidence good outcomes for a million customers, to the standard the regulator expects for a few hundred? The answer to that question may well shape the next phase of the advice market.

This article first appeared in MoneyMarketing.