Looming personal finance crisis will only be solved by better access to advice

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byStephen Marzo

As the impact of COVID-19 plays out over the months and years to come, technology will help usher in a new advice model which reaches out to a broader spectrum of clients.


UK households have now endured over six months of financial impacts as a result of COVID-19. The Standard Life Foundation has been running a financial impact tracker since March, shining a light on how well households are negotiating their way through this global crisis.


As of May 2020, only 37% of UK households (10.4 million) were considered financially secure, with negligible change when surveyed again in July. The remaining 63% of households have been struggling in some form, with 11% (3.1 million) experiencing serious financial difficulty and another 17% (4.6 million) struggling to make ends meet. Others are not in immediate danger but are potentially exposed, especially when government supported schemes begin to end, according to the Foundation’s latest household  survey.


The survey shows that despite a strong economy with record low unemployment going into 2020, most of the population was not prepared for a shock (Statista). Over the past several months, we’ve seen COVID-19 evolve from a global health crisis to a global financial crisis whose impact has been felt across millions of households in the UK.


By the end of July, 34% of UK households had seen a decrease in income as a direct result of COVID. Although the month of May saw the UK make significant progress in “flattening the curve” in terms of the virus, the economic impact of the pandemic continues to spread. One in six households (17%) had their earnings propped up by government job retention schemes which are also due to end on 31 October, leaving around 3 million households expecting a drop in income. 


Financial Difficulty is Nothing New

With few signs of any sort of turnaround in the near future, these figures are cause for concern. However, what is perhaps just as concerning is the fact that many of these households were already in a financially unstable situation prior to the pandemic.


OpenMoney’s 2020 Advice Gap Report reveals that COVID-19 was less of a root cause and more of an amplifier of the “precarious financial situation” of much of the population “in the days before the crisis really escalated.” So, while it is important to acknowledge the tangible impact the pandemic has had on many individuals’ personal finances, it should not be used to sweep any pre-existing issues under the rug. The data suggests that a significant percentage of the population has been apathetic towards their personal finances. As a result, few were prepared for a shock to the economy like the coronavirus.


According to the survey results, approximately two-thirds of UK adults had outstanding household debt as of early March. Although lenders have tried to accommodate those struggling by providing payment holidays, this is a short-term solution that will only delay the problem. Saving habits and financial planning have also been poor. Only 28% of the UK adult population was in a position to cover essential expenses without income for three months, while less than a quarter of survey respondents planned their finances more than a year ahead.


Standard Life Foundation’s recent data suggests that those who have struggled because of COVID will likely sink into a deeper hole. Among households experiencing serious financial difficulty, 61% said they could not make ends meet if their income fell in May, up 51% from April. In addition, 70% of these people lack any sort of savings, while 27% have used their limited savings to make ends meet. 


Long-term Implications

The most shocking findings in OpenMoney’s report is that despite the number of people struggling financially, 62% of respondents believed they did not need any help with managing money and making financial decisions. The report also reflected a general mistrust towards financial advisors, with 79% of respondents unlikely to pay for financial advice, most citing high prices, and lack of confidence as the two factors that deterred them from the service.


As the pandemic continues to damage the economy and more workers are made redundant, those with poor financial planning will no doubt go through a period of significant financial turbulence in the coming 5-15 years. This period will ultimately serve as a wake-up call for the millions of people who lacked the necessary preparation for a shock to the economy. It is safe to say that as they recover, many of these people will be looking for ways to make themselves less susceptible to economic shocks in the future. 


With almost three quarters of the UK population unhappy with their savings as of July 2020, we can expect more people to be looking for guidance when it comes to saving, spending, and investing. This is potentially a significant demographic that Advisers could widen their focus to encompass through the efficiencies that new technology provides.   


The Role of Financial Advisers

Financial advisers have certainly not sat idle amidst the pandemic. Many have been proactive about providing services that take weight off the shoulders of those that have been impacted most. According to a recent Citywire report, 60% of financial advice firms have given pro bono guidance in response to COVID, and many have reported meeting clients more frequently, albeit virtually.


While one-off pro-bono advice is helpful, it’s only a short-term solution. What most people need is long-term financial planning—expertise that can help them attain a secure financial future. The transition from Defined-Benefit pensions to Defined-Contribution pensions only strengthens this need. The current rate of savings of Brits in their 20s and 30s under a DC pension will leave most with a pot of money far too small to meet their retirement goals.


Financial advice providers will need to respond to the increasing need and appetite for their services among a younger, less wealthy demographic. Unfortunately, the manual nature of existing workflows coupled with an asset based fee structure often mean this market is under-served. The adoption of technology can go a long way to addressing this however there is also a need for Advisers to begin looking more at the lifetime value of clients vs the short term fees that can be earned if this market is to be truly captured.


A New Channel for Advisers

The implementation of technology will allow Advisers to introduce a largely untapped new channel. Serving clients digitally will lower the cost-to-serve, Advice Front estimates advisers lose out on an average of £46.38 per day on tasks that can either be automated or done faster digitally, which adds up to a whopping £10,222.15 annually. These tasks range from re-keying data and fact-finding to physically filing paperwork, and the costs of these tasks are currently being passed on to the client.


One can imagine a 90% digital offering with just 10% adviser input for clients on the lower-end of the spectrum, and a more adviser heavy offering for wealthier clients. This will drive a hybrid advice model which can still drive short term revenue into Advice firms while locking in long-term clients.


More than ever, people are in need of financial advice, and as many go through a period of serious financial discomfort, an appetite for financial advice will grow. Advisers have an unprecedented opportunity to use technology to not only improve profitability, but do so while filling a huge gap in the advice market.



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