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02 Mar 2023
by Stephen Lowe

How digital advisers could lead way to better financial decisions

New hybrid solutions can make complex issues like retirement planning easier and less expensive

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The first mainstream IBM personal computer was rolled out in 1981. It emitted strange noises, with a complex ‘call and response’ sequence of codes, all set against a black screen that created a sense for foreboding. Little wonder annual sales were less than 10m units worldwide five years after launch.

Enter Apple, with a friendly user interface and a mouse to point and click using one hand. The rest, as they say, is history. In the developed world, the personal computer is now an essential requirement, with 275m units sold in 2020.

There are parallels with the development of digital advice. The first iterations were often little more than online fact finders or decision trees. The early pioneers were largely standalone,  entrepreneurial firms. These firms were usually tech savvy, but often lacked an understanding of consumer behaviour. They were also often unknown, which made it less likely that people would entrust them with their hard earned savings.   

More effective engagement

The emergence of established brands with greater focus on the consumer, coupled with new technological developments has helped providers create new digital solutions that engage people more effectively. For example:

  • Gamification This is the art of applying elements of game play, like point scoring, quizzes and competitiveness, to encourage engagement with a product or service. According to the Oxford Dictionary, ‘gamification’ is exciting because it promises to make ‘the hard stuff in life fun’. Gamification can make financial planning less onerous.
  • Behavioural economics In face-to-face interactions, advisers can assess shifts in their clients’ manner or attitude and adapt their behaviour. This isn’t possible online, so a deep understanding of human behaviour is required. This can help providers phrase questions effectively, dictate the order in which information is presented and recognise when people need to be nudged to keep going.
  • Analysis, analysis, analysis Online propositions provide forensic insights to understand what works and what doesn’t. Armed with this information, providers can carry out continuous improvements to optimise the experience and change any parts of the process causing consumers to stop and withdraw. If needed, conventional research can provide richer information on behaviour.
  • The hybrid model Many people crave the reassurance provided by human contact. This need increases with the scale and complexity of the issue. People may be happy to open a savings account online, but reluctant to take significant decisions with their pension savings, without recourse to a specialist. As well as access to a human being at key stages during the process, chatbots and virtual assistants are also used to provide further help and support.

When faced with complex and important choices such as at retirement, people are inclined to take advice more seriously. Yet, many people who could benefit from help and advice aren’t accessing it. Open Money research in 2021 revealed that fewer people than ever are taking regulated financial advice. On the face of it, this would suggest an absence of demand, but the evidence doesn’t support this. The research calculates that an estimated 6 million Britons want advice, but think it’s too expensive.

The new hybrid solutions can bridge this gap. They provide fully regulated retirement advice at a significantly lower cost. They have other advantages too. They’re seen as more convenient. The process can be undertaken in the home at a suitable time. It can be completed in one go or in steps. It’s also considered more objective.

Rightly or wrongly, consumers may believe that an adviser’s motives might not always be aligned with their best interests. They are more likely to assume a digital solution is product agnostic, according to research.

Support for automation

The Financial Conduct Authority, the UK’s financial watchdog, supports automated solutions. Assuming the algorithms are sound, they eliminate human bias and provide consistent, repeatable, dependable outcomes. And a clear audit trail, too.

These contemporary hybrid services help people who may not otherwise access advice, because of the costs, to make sound decisions at critical points in their life like retirement. The government has recently introduced the ‘stronger nudge’ to provide guidance through its Pension Wise service. For some this will be enough. It will give them the confidence to make rational decisions or validate the decisions they plan to take. For others, it’s not enough. For these people, advice is the solution.

Pension schemes can be at the forefront of this development and harness the benefits of these new hybrid digital solutions to help their members plan their retirement and improve their financial wellness. While some pension schemes already facilitate access to advice for their members, for others this is the missing piece that could provide better retirement outcomes now and into the future.

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