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Hybrid advice: do the numbers stack up?

No one said building an advice business was easy. Even if you’ve got a giant brand and a captive audience behind you already, starting something from scratch takes time and money. It’s far from easy. In fact, it’s incredibly difficult. So it has proved with hybrid advice.

The list of firms that have tried to make it work nonetheless is a lengthy one. A very cursory search reveals those to have discussed the idea include everyone from Aviva, Quilter, Vanguard, Goldman Sachs and M&G to Nutmeg, Abrdn, Coutts, Hargreaves Lansdown and Bestinvest.

But in recent weeks, the list of those pulling the plug has also grown. Quilter planned to launch by the end of the year, but dropped the idea last week. Vanguard shuttered its UK advice plans at the start of the month, and BlackRock sold off its robo-adviser too.

Goldman’s latest strategy shift involves rolling back on plans to grow its consumer unit that included buying up and developing its own robo-advisers. Peter Hargreaves slammed his eponymous firm’s autonomous advice drive as ‘unnecessary’ and ‘irrelevant’ in January, noting the plans had done little to improve the company’s ailing share price.

Mind the gaps

Why have we seen such a turnaround? As with all business decisions, it comes down to the bottom line. For clients, the main advantage of hybrid advice is cost. If that’s the main barrier stopping you seeing a planner, then a lower entry point might be more appealing. You might even move on to a full-fat planner in the future.

Yet there are a whole host of other reasons people aren’t getting advice. The evidence suggests these are actually far more significant in the minds of consumers. There are indeed those who are willing to pay for advice, just not at today’s prices. That’s called the affordability gap. People who want advice but can’t afford to pay for it at all, fall into the so-called free gap. Some people don’t know advice exists at all – the awareness gap – or where to go to get it – the referral gap.

A study by Open Money suggests that the around 20 million people fall into the free gap. The number in the awareness and referral gaps is 15.2 million. By contrast, the affordability gap stands at around 6 million.

It doesn’t take a mathematician to see three times as many people aren’t seeking advice because they can’t afford to pay for it at all or don’t know what or where it is, than have an issue with the exact price point. But it is that latter market that hybrid advice seems to want to tap in to.

In another study from EY, just 1.4% of respondents said they preferred digital and voice-enabled assistants as a primary communication channel, and 42% preferred to receive advice either face-to-face or through phone calls.

That may have been in 2019, but it still doesn’t sound overly optimistic when hybrid advice is meant to be attractive to a new tech-savvy generation of investors that are supposed to want fundamentally different things from their planning firm.

Those young investors occasionally also fall into the free advice gap, rather than the affordability one: 21% of households aged 30 to 39 disagreed with the statement ‘I am willing to pay for advice,’ according to a 2017 study by Cerulli Associates, a Boston-based research and consulting firm.

The sceptics among us might argue that this shows that the potential pool of people a hybrid proposition might attract is smaller than we might have expected.

Can’t pay, won’t pay

Hybrid advice can’t solve the free advice gap — no company can afford to charge zero for a service that costs something to provide. It may make a small dent into the awareness and referral gaps, but only by accident – by being tied to a prominent brand that is able to target its legacy client base, or by spending more money on marketing a new proposition to put it on people’s radar.

The statistics suggests there just isn’t this huge swathe of potential clients in the middle ground that are just crying out for advice, if only it was 0.3% a year, not 1%. And even if there was, firms would struggle to make any money from them.

Say the specific price point of fuller advice was the main barrier, meaning firms would suddenly see an influx of new customers for their hybrid propositions. The size of the influx would still need to be considerable to make them profitable.

Nutmeg has for years tread this sometimes uncomfortable ground and is sitting on cumulative losses of over £100m to show for it.

‘Robo-advice’ is a wide definition that will include some firms that, strictly speaking, don’t give hybrid advice, but when Money Marketing looked at the market in 2020, it found losses across 12 leading firms had increased by a third to more than £50m, every one that disclosed publicly failed to make a profit, and some were still losing hundreds per client despite external investors ploughing some £350m into the firms.

Quilter CEO Steven Levin admitted defeat on exactly these grounds last week, saying there was ‘too much complexity…too much cost’ in the business already.

The definition of hybrid

True, part of the problem is with definition. Is your ‘hybrid’ service really just an adviser on the other end of the telephone? Is it a digital fact-find that then gets passed to an adviser? A real human that you can actually go and see once your needs reach a certain level? A direct investing platform that only actually offers guidance, not regulated advice? A combination of all of the above?

Being clearer on what the proposition actually is and who it is for, will certainly help more consumers come and get advice. But again, that is an issue of awareness and referral, not of affordability necessarily. In short, hybrid advice has a mountain to overcome to be a success. Let’s hope someone can crack it, for the sake of the clients who could still benefit from it.

Photo by Greg Plom on Pixabay


About the Author:

Justin Cash is online editor at Dow Jones’s Financial News title. He was previously editor of Money Marketing magazine, and has also worked for titles including Legal Week and Citywire. His work has featured in publications ranging from The Financial Times, The New Statesman, Total Politics and The Independent, to CityAM and The Huffington Post. During his time running Money Marketing, the magazine has won the Headline Money B2B Title of The Year Award. Individually, he has been shortlisted in the Press Gazette Specialist Media and Santander Media Awards, and has won a James Hay Award and the Personal Finance Awards’ Trade Journalist of the Year Award. Cash graduated with a 2.1 in Politics, Philosophy and Economics from Durham University and has a masters in Investigative Journalism from City University, London.

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