Why digital solutions might tempt more pension savers to take advice

New digital models can make advice at retirement more affordable and bridge the gap between talking to a financial advisor and doing nothing

It’s part of everyday life to give and receive advice. Trading recommendations about everything from fashion to careers. And when we’re not giving advice, we tune into the advice of others through agony aunt columns, radio phone ins or the blogs of influencers or opinionated pundits.

At some points in our life we take advice more seriously. When faced with complex and important choices, like retirement, for example. Then, advice becomes a more structured interaction.

Guidance vs advice

In financial services it can take two forms.

One way is to guide clients’ thinking by raising their consciousness, filtering information and explaining options, but not seeking to influence the final decision. This is what we call ‘guidance’. For some people, it’s 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 can be the solution.

A financial adviser will make a personal recommendation. They’ll analyse the clients’ financial circumstances, explore their goals, evaluate attitude to risk/capacity for loss and use cashflow forecasting to project a range of different financial outcomes. What’s more, an adviser will regularly review whether the investment strategy or a client’s goals needs to change.

Cost puts many people off

Many people who could benefit from advice aren’t accessing it. The elephant in the room is often cost. Open Money research in 2021 revealed that fewer people than ever are taking regulated financial advice. Just 7% of people paid for advice in the previous two years. 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.

A 2017 Social Market Foundation report found that the average amount people would pay for advice to turn a £100,000 pension pot into a retirement income would be £456. The actual amount to advise on a £100,000 pension pot was estimated at £2,000. These figures are a little out of date, but there is a wide chasm between what many people are prepared to pay and the fees charged.

This disconnect can be explained partly by the difficulty in quantifying the value of advice. Fees for advice at outset are a sunk cost. In contrast, quantifying value from using the services of an adviser is more elusive. The benefit of advice, in any comparative sense, will always be conjecture. We can’t assess the impact, relative to doing nothing or doing something else, until years into the future.

There are also supply side issues with traditional advice. A 2019 survey of 250 advisers revealed that only 16% of advisers would take on a client with less than £100,000.

Digital models offer another way

Digital advice models can bridge the gap. These provide fully regulated retirement advice at a significantly lower cost. A digital solution has other advantages too. It’s seen as more convenient. It can be undertaken in the home at a time that’s convenient. The process can be completed in one go or spread over days or weeks. 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.

One of the criticisms levelled at digital solutions is the lack of human interaction. Many people crave the reassurance and validation a face-to-face adviser can provide. This has led to hybrid models that combine the efficiencies afforded by digital solutions with human interventions at critical stages in the process.

The FCA is broadly supportive of automated solutions. Assuming the algorithms are sound, they eliminate human bias and provide consistent, repeatable, dependable outcomes. There’s also a clear audit trail.

Pension schemes can be at the forefront of this development and harness the benefits of hybrid solutions to help members plan their retirement. 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.