Filling the Advice Gap: a startup opportunity
What is the Advice Gap?
To set the context, let’s briefly compare the financial affairs of a typical Baby Boomer vs a typical Millennial, both with average-good salaries:
- Defined Benefit pension from their employer guaranteeing a retirement income of 60% of their final salary.
- Relationship with an IFA (Independent Financial Adviser) who invests their money in a balanced portfolio of funds and ensures they have the right life insurance, will and mortgage. They do pay too high a management fee which gives their IFA some nice commissions.
- Speak to their insurance broker for any insurance purchase.
- Bought a house in their youth, struggled to pay the mortgage when interest rates spiked but now have a substantial mortgage-free asset
- Credit card is their main card, roll the balance & so pay high interest
- Watch Martin Lewis and are always looking out for discounts
- Defined Contribution pension through their employer (or even worse they are in the ~10% who turned down free money by opting out). They have no idea if it is enough for a comfortable retirement. Spoiler alert — it isn’t.
- Don’t know what an IFA is and don’t have a will.
- Have mobile phone insurance but not life insurance.
- Select all their insurance/banking through comparison sites
- Are renting or have an interest-only mortgage
- Have some investments: a mix of crypto, shares and ETFs bought through a zero commission broker.
- Switch savings account for a 0.1% better rate, but have no idea how much of their money to keep in cash
- Don’t own a credit card but are a Klarna super-user
The Millennial is paying less in commissions and fees, but they are missing the big picture. Either they need to take the time to educate themselves, or they need decent advice. An interesting anecdote is the rapid word of mouth growth of myfirst which sells new driver insurance on the phone rather than online and emphasises the advice they give new drivers and their parents. Illustrates how even in categories that have become online-first, there is demand for in-person advice.
What should this advice look like? It is not going to be an IFA coming to your home with a leather folder, asking for statements and filling in a questionnaire in pen, then sending you a letter a fortnight later. Neither is it a roboadvisor. These helped bring down investment costs and improved accessibility of creating a rational stock portfolio, but the advice gap is much broader. No-one has yet cracked the code here, but I suspect it will be involve some of the following:
- Using open banking and open finance to automate all data capture
- Either a tech platform combining AI, algorithms for portfolio optimisation and bringing in a human coach where needed, or technology which allows human financial advisers to service 10x more clients without compromising on quality.
- Something you can do on your mobile in the evening on the sofa.
- Combination of video content, whatsapp-style conversations with AI and advisors, and if needed video chats.
- Able to take a holistic view across all your financial affairs: property, job, assets, insurance, budget.
- A personalised experience starting with the basics (get a pension) but able to go into areas like tax optimisation, international diversification and estate planning over time. Or multiple products for people of different levels of wealth and knowledge.
- Potentially provided through your employer, who are increasingly taking responsibility for the financial wellness of their employees.
- Alternatively delivered direct to consumer experience with a trusted front person — a younger (female?) version of Martin Lewis. Or like Peloton this could be a range of trusted instructors targeting different demographics: Olivia Amato gives investment advice to the 25–35 female Londoners earning six figures, while Alex Toussaint preaches discipline and motivation to couples struggling to get on the property ladder.
- Independent of product providers.
- Using social pressure and psychological techniques to provoke action.
- Tracking ESG impact throughout.
There are however some tricky challenges to address:
- Inertia. Financial planning is always at the end of someone’s to-do list. How do you bring urgency to this?
- Regulation. It is hard to provide meaningful advice without becoming a regulated financial advisor, which then carries a lot of overhead and constraints.
- Financial decisions come with lots of complexity, and often no right answer. However, there are plenty of wrong answers and for the vast majority of people there are clear actions that they need to take.
- How to get paid as a provider while remaining completely independent. Ideally the adviser wouldn’t take commissions, but providers are willing to pay much more money for new customers than customers are willing to pay as an explicit fee. Maybe the compromise here is pay per lead, something like Adwords.
- Typical pricing and commissions in sector are a % of AUM (assets under management) which makes targeting young people with smaller savings less attractive.
Despite the challenges this is an area where I see significant opportunity to help people take back control of their financial future, and have been looking for companies for some time. Balderton’s investments in Wagestream, Cleo and Nutmeg have addressed parts of it but not the whole issue. If you are doing anything in this area across Europe and we haven’t spoken please reach out to firstname.lastname@example.org.
[This article is UK-centric but a similar problem exists in most European markets and certainly in the US.]