The future of automated financial advice in the UK · Hybrid Banks Banks Large, passive fund managers Retail investment platforms Life insurers Life insurers Start-ups in D2C role

The next frontierThe future of automated financial advice in the UK

Table of contents

Executive summary 01

Part 1: Automated financial advice market overview 05

1.Whatisautomatedfinancialadvice? 06

2. The context 08

3. Theregulatoryperspective 15

4.MachinelearningandArtificialIntelligence 22

Part 2: Automated financial advice – a view of individual markets 23

A. Simplefinancialplanning 24

B. Investing 26

C.Definedcontributionpensionsaving 30

D. At-retirement 33

E. Mortgages 36

F. Individualprotection 39

Next steps – key questions to consider 42

Conclusion 43

Endnotes 44

Executivesummary

Muchhasbeenwrittenabouthowautomatedadvisers,morecommonlytermed‘roboadvisers’,coulddisruptthemarketforinvestmentadvice.Inthispaper,weseektoanswerabroaderquestion:whatisthepotentialforautomatedfinancialadvicetogrowintheUK,overthenextdecade,acrossthefollowingsixmarkets?

Simple financial planning

Investing Defined contribution

pension saving

At-retirement Mortgages Individual protection

Theviewsweexpressinthepaperhavebeeninformedbydiscussionswithkeyplayersandstart-upsinthebanking,insurance,wealthandinvestmentmanagementmarkets,aswellasbyaDeloittesurveyofover2,000consumers.1

Pool of potential adoptersOurmainconclusionisthattheUKoffersarichopportunityforautomatedadvice.Thereisasignificant‘advicegap’,drivenby thehighcostofadvice,lowfinancialliteracy,lowengagement andalackoftrustfollowingpastinstancesofmis-selling.2

Withindividualsbeingincreasinglytaskedwithmanagingtheirownpensionprovision,andinthecontextofarelativelylowstatepension,automatedadvicecanplayakeyroleingeneratinglow-costsolutions.Oursurveyresearchpointstoasizeablepoolofpotentialadoptersineachofthemarketsweexamined(seeFigure1).

OurmainconclusionisthattheUKoffersarichopportunityforautomatedadvice.Thereisasignificant‘advicegap’,drivenbythehighcostofadvice,lowfinancialliteracy,lowengagementandalackoftrust following past instances of mis-selling.

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The next frontier | The future of automated financial advice in the UK

Figure 1. Estimated number of future users of automated advice

Source: YouGov 23-24 January 2017, Deloitte analysis of consumer survey data. Samples: simple financial planning (2,046), investing (842), defined contribution pension saving (342), at-retirement (173), mortgages (989), protection (457). Note: respondents indicated that they would be willing to pay for automated advice in more than one market.

Investing

Defined contribution pension saving At-retirement

Mortgages Individual protection

Simple financial planning33m heads of families

and single adults

34% willing to pay

around 11mpotential adopters

35% willing to pay


19m heads of families and single adults aged under 50


18m adults with > £5,000 savings and investments

40% willing to pay


4m workers aged 30+ with >£20,000 pension savings

40% willing to pay

around 1-2 millionpotential adopters

6m heads of families with children aged <18

45% willing to pay


9m workers with a defined contribution pension

38% willing to pay

0202


Overall,oursurveyanalysissuggeststhatupto15millionGBadultswouldbewillingtopayforautomatedadviceinatleastonemarket.However,demandvariesconsiderablybyconsumersegment. Atamacrolevelitis:

• high among consumers in their early forties, despite the fact that this group is often considered to be less enthusiastic about new technologies than millennials

• high among those with above average income, despite the fact thatthisgroupismoreabletoaffordtraditionalfinancialadvicethanthosewithaverageincomes

• consistent, overall, across wealth levels with the exception of defined contribution (DC) pensions, where appetite for automatedadviceishighestamongthosewiththesmallestDCpots.ThisisaclearopportunityinourviewandmayreflectthelackofpublicallyavailableinformationoninvestingwithinaDCpension.

Pricingtheseservicesaffordably,however,willbekey.Ourresearchfound that although more than a third of consumers would be willingtopayforautomatedadvice,theamountstheyarepreparedtopayaregenerallylow.Thatsaid,webelievelargepotentialcustomerpools,coupledwithhighlyefficientdigitalsolutions,couldcreateeconomiesofscale,makingautomatedadvicebothaffordablefortheconsumerandviablefortheprovider.

Figure2capturesourkeyinsightsonwhichplayersmaybemostadvantagedineachmarketandthemostappropriatechannelstodeliverautomatedadvice.Itdrawsonourconsumerresearch,interviewswithsubjectmatterexpertsandconsiderationof a range of future scenarios.

Upto15millionGBadultswouldbewillingtopayforautomatedadvice...


Investing Defined contribution

pension saving

At-retirement Mortgages Individual protection

Figure 2. Future of UK automated advice research framework

Source:Deloitteanalysis.Note:financialplanningreferstosimplefinancialplanning,suchasdecidingwhethertoinvestinanIndividualSavingsAccount(ISA)orapension.

Digital only Digital only

Hybrid

Banks Banks

Large, passive fund managers

Retail investment platforms

Life insurers Life insurers

Start-ups in D2C role

Start-ups in B2B role

Optimal channel

Advantages players

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Intermsofchannels,formorecomplexdecisions,customerswillstillwanttospeakwithanadviserinadditiontousingawebsite–theso-calledhybridmodel-toensuretheyhavemadegoodchoices.Hybridmodelsarealsolikelytobeprevalentincertainmarkets(e.g.mortgages,at-retirement)becausetheycanensuresafeguardstothesuitabilityofadvice.

Intermsofindustryplayers,nosingletypeoffinancialservicesproviderisadvantagedacrosstheentireopportunityset.However,incumbentsgenerallyenjoyanadvantageoverstart-upsin direct-to-consumer(D2C)opportunitiesduetotheirexisting scale and brands.

What does the future look like?Todate,automatedadvicehasbeenmostprevalentinwealthmanagement,whichwebelievewillremainfertilegroundforinnovation,giventheincreasedneedforhighernetreturnsfromsavingsinalowinterestrateenvironment.However,thelowcost,highconvenienceandconsistencyofautomatedadvicewilldriveadoptionintootherlargemarkets,especiallythosewherethereisasignificantunmetneedforadvice,suchasretirementproducts,andthosewhichareheavilyintermediatedbutoftenhaveinefficientcustomer-facingprocesses,suchasmortgages.

Lowconsumerfinancialliteracyandengagementarethekeydemandbarrierspreventingautomatedadvicefromreachingitsfull potential. Supply barriers include high customer acquisition costs,lowfeesdrivingthinmargins,incumbentfearsofcustomerswitchingintolowermarginproducts,andregulatoryrisk.Someofthesechallengescanbeovercomebyusingtechnologytomakeiteasierforconsumerstoengagewiththeirfinances,creatingcostefficienciesthrougheconomiesofscale,targetingservicesatparticularconsumersegments,andeffectivecompliancecontrols.

Providersfrequentlyreportthatregulatoryuncertaintyindeterminingwhichservicesareregulatedisabiginhibitor,suggestingthatmoreclarityfromtheregulatorwouldunlockdevelopment.Otherregulatorychallengesincludeclarityofcustomercommunications,thedesignandoversightofalgorithmsandcyberrisk.TheFinancialConductAuthority(FCA)issupportiveofthedevelopmentofautomatedadvicemodelsandisplanningtopublishregulatoryguidanceandfeedbackthatshouldhelpaddresssomeoftheregulatorybarrierstotheirdevelopment.However,automatedadvicecanalsoleadtoregulatoryadvantagesforfirms,by way of a clearer audit trail and consistent customer outcomes.

IntheUS,certainincumbentsdominateintermsofassetgatheringandaredrivingthepathandpaceofadoption.However,thisisduetotheirdecisiontoproactivelyexploitthisopportunity,disruptingmarketsevenattheriskofsomecustomersswitchingtolowermarginproducts.Webelieveadoptingsuchamindsetwillbenecessary,otherwiseincumbentsriskbeingbystanderstothefuture of their industry.

Start-ups,however,haveavarietyofopportunitiesinbothservicesprovidedtootherbusinessesandD2C.Theiradvantagesintechnology,focusandnimblenessenablethemtobuildmoreengaging customer interfaces and adapt faster to changing markets.Duetothehighhurdleofcustomeracquisitioncosts,webelievetheirkeyopportunityinitiallywillbetoofferwhitelabelsolutions to bigger players.

Thispaperisdividedintotwoparts:

• Part 1exploreswhatismeantby‘automatedadvice’,providesanoverviewoftheUKautomatedadvicemarket,andassessestheregulatory challenges.

• Part 2 discusses the opportunities arising from automated advice,thebarriersandtheimplicationsforindustryplayersacrossthefollowingmarkets:simplefinancialplanning,investing,DCpensionsaving,at-retirement,mortgagesandindividualprotection.Itthendrawsoutourkeyquestionsforfirmsandoverallconclusions.

Todate,automatedadvicehasbeenmostprevalentinwealthmanagement,whichwebelievewillremainfertilegroundforinnovation,giventheincreasedneedforhighernetreturnsfromsavingsinalowinterestrateenvironment.

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Part 1Automatedfinancialadvicemarketoverview

0505


1.Whatisautomatedfinancialadvice?

Theterms‘automatedfinancialadvice’,‘roboadvice’and‘digitaladvice’areoftenusedinterchangeably,butwhatexactlydotheymean?Theycanbeusedtodescribeservicesrangingfromregulatedadvice,unregulatedguidanceanddiscretionaryinvestmentmanagement.3Theprovisionoftheservicecanbepurelyautomated,orpartlyautomatedwithsomehumanintervention.Theservicemaybeprovidedbyasinglefirm,orbymorethanonefirmpartneringtogether.Thereisnoconsensusonexactlywhichservicesandchannelsareincludedwithintheseterms.Automatedadviceisnottypicallydefinedinlegislationorregulation.Descriptionsbyregulatorshavecommonelementsbutdifferindetails.4

Figure3showstheservicesandchannelsassociatedwiththeterm‘automatedadvice’.Inthispaper,whenwereferto‘automatedadvice’,wemeanthisinagenericsenseincludingalloftheservicesand channels which are shaded in Figure 3. Where we are only referringtocertainservicesorchannels,wewillusespecificterms,suchas‘regulatedadvice’,‘guidance’and‘fullyautomated’.

Currentlythecomputeralgorithmsusedtoprovidetheseservicestendtobeprogrammedtodeliverpre-determinedoutcomesbasedonthedatainputted.However,lookingaheadthereisanopportunityforartificially-intelligentlearningalgorithmstoenable automated systems to respond to a broader range of more complex scenarios. This is further explained in Section 4.

Lookingaheadthereisanopportunity forartificially-intelligentlearningalgorithms to enable automated systems to respond to a broader range of more complex scenarios.

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Figure 3. What is automated financial advice?

Service and regulatory status in the UK*

Regulated advice **Advicegiventoapersononthemeritsoftakingaspecificaction(e.g.buying,selling)inrelationtoaspecificfinancialproduct

Guidance (unregulated)Theprovisionofinformation,genericadviceonwhattypesofproduct may be suitable and/or a general recommendation supportingcustomersinmakingtheir own decisions which does not (inandofitself)involveapersonalrecommendation

Discretionary investment management (regulated)Aninvestmentmanagerdecideswhatproducts to buy and sell on behalf of thecustomer,basedonamandateagreed with the customer

Chan

nel

Traditional face-to-faceCustomersinteractwithahuman,whogeneratesadvice,investmentdecisionsorinformation(dependingontheserviceprovided)withouttheaid of a computer algorithm

Face-to-face assisted by an algorithmCustomersinteractwithahuman,who uses a computer algorithm togenerateadvice,investmentdecisionsorinformation(dependingontheserviceprovided)butcanoverridethealgorithmifneeded

HybridCustomers interact with a website but may also interact with a human (e.g.viaawebchatorbyphone),forexampleifcustomershavequestionsorthefirmneedstoaskfor additional information

Fully automatedCustomers normally interact with a website only. They may still be abletospeaktoahumaniftheyneedtoresolveanyITissues,makea complaint or clarify terms and conditions

Key

Automatedregulatedadvice Automated guidance Automatedinvestmentmanagement

* ThedefinitionsofregulatedadviceandguidanceinFigure3arebasedontheUKregulatorydefinitionsbutarenotdirectquotationsbecausethedetailsofthedefinitionsvaryacrossfinancialservicesmarkets.

**Suitabilityrequirementsapplywhenregulatedadviceinvolvesa‘personalrecommendation’,forexampleadvicebasedonaconsiderationofthecircumstancesofthe customer.

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2. The context

Todate,automatedfinancialadviceintheUK,asinmostoverseasmarkets,hasprimarilytakentheformofinvestmentportfoliooptimisationbasedoncustomerneeds,usinglargely(butnotexclusively)passiveinvestmentproducts.Innovationhaslargelybeenledbystart-ups,whicharehamperedbyveryhighcustomeracquisitioncostsandlowcustomerfees.StringentUKregulatoryrequirementshavemadesomeinnovatorsmorecautious.

Outsideofwealthmanagement,therehasbeenverylimiteddevelopmentofautomatedfinancialadvicebyeitherincumbentsor start-ups,withplayerssuchasHabito(mortgages)andWealthWizards(retirementadvice)beingfewandfarbetween.

However,theneedforaffordableadviceisgrowing,withindividualsbeingincreasinglytaskedwithmanagingtheirownsavings,asevidencedbyashiftfromdefinedbenefit(DB)toDCpensions,auto-enrolmentand‘pensionsfreedom’.5 This is in the context of generallylowfinancialliteracyandengagement.

The potential for automated adviceConsumersneedfinancialadviceatdifferenttimesintheirlives.Theirneedsvaryconsiderablyasdoesthecomplexityofthoseneeds.TakingoutamortgagehaslittleincommonwithtoppingupastocksandsharesISA.Thefinancialdecisionsfacingindividualsatretirement(whenwealthtypicallypeaks)areverydifferentfromthosefacingindividualsjustjoiningtheworkforceforthefirsttime.Wehaveidentifiedsiximportantadvicescenarios(seeFigure4).

Figure 4. Illustrative customer life cycle, wealth by age, UK

Wealth

16-24 25-34 35-44 45-54 55-64 65-74 75-84 85 and over

Retirement

Retirement saving

Finding a mortgage

Buying lifeinsurance

Investment

Financial planning

08


Figure 5. Usage of advice on product purchases among GB adults, 2014-16

0% 5% 10% 15% 20% 25% 30% 35% 40%

Non-professional advice

Other professional advice

An accountant or solicitor

Don't know

Mortgage broker

My employer/previous employer

A bank – advice for a fee

A website or online platform

An independent financial adviser

A bank – free advice

Family and/or friends

Purchased without advice

Not purchased product

Main paid-for advice channels

Source: YouGov 23-24 January 2017, Deloitte analysis. Sample: 2,046.

36%

20%

12%

11%

11%

10%

7%

6%

5%

4%

3%

1%

0%

Thehighcostofadviceanddisinclinationtotakeit(regardlessofcost)arekeybarriersacrossthesescenarios.Wenotetheverylowtake-upofanyformofpaidadviceamongoursurveyrespondentswiththerelativelywealthymorelikelythanotherstotakeadvice.Forinstance,amongthosewithsavingsandinvestmentsworthmorethan£30,000,afifthhadtakenadvicefromanindependentfinancialadviserinthepastthreeyearscomparedto11percentamongalladults(seeFigure5).TheincreaseddisclosureofcostsandchargesundertherevisedMarketsinFinancialInstrumentsDirective(MiFIDII)from2018couldfurtherheightenconsumers’costconsciousnessforadviceonretailinvestmentproducts.

Incontrasttoface-to-faceadvice,automatedadvicehasseveraladvantages.Themostcommonlyacceptedare:

• lower costs • highconvenience,givenitsavailability24x7 • consumers may be more willing to disclose details of their financialsituationtoamachineratherthantoahumanadviser

• potentialtoincreaseefficiencyforproviders • adviceisconsistentacrossclientsandcanprovideafullaudittrail.

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Weanalyseconsumers’attitudestowardsautomatedfinancialadviceacrosssixscenariosanddrawoutthekeyimplicationsforindustryplayerslaterinthepaper.However,wesummarisesomeoverallthemesthatapplyinallsixscenariosbelow.

More than a third of respondents in all scenarios showed a willingnesstopayforanautomatedadvicesolution(seeFigure6).Weconsiderthesefigureshighinthecontextoflowtake-upofregulatedadviceandthatautomatedadviceisstillintheearlystagesofdevelopment.

More than a third of respondents in all scenarios showed a willingness to pay for anautomatedfinancialadvicesolution.

Figure 6. Willingness to pay for automated advice by scenario

0% 20% 40% 60% 80% 100%


Investing £80 monthlypension contributions

Finding a mortgage

Converting £30,000 pensionsavings into a lump sum and

retirement income

Investing £11,000

Finding life insurance

Yes

Source: YouGov 23-24 January 2017, Deloitte analysis. Samples: Finding life insurance (457), investing £11,000 (842), converting £30,000 pension to lump sum and income (173), finding a mortgage (989), investing £80 monthly pension contributions (382); simple financial planning (2,046).

45%

Don’t know No

15% 40%

40% 8% 53%

40% 16% 44%

38% 16% 46%

35% 20% 45%

34% 12% 54%

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Attitudinal barriers to seeking automated adviceWealsoaskedthoseindividualswhowereunwillingtouseanautomatedsolutiontoexplainthereasonsfortheirreticence,to gauge the attitudinal barriers to adoption. These are remarkablysimilaracrossthesixadvicescenarios,andspeaktothereassuranceconsumersseekaboutthecapabilityoftheseservices,aswellastheneedforanaffordableprice.

Thetwomostcitedreasons(byaroundathirdofrespondents)arealackoftrustinadigitalsolution,aswellasanunwillingnesstopay.Thisisunsurprisinggiventhattheseservicesdonotyetexistatanysubstantialscale.Inaddition,theunwillingnesstopayisalsoevidencedbytheexistenceofan‘advicegap’:peopleunabletogetadviceatapricetheyarewillingtopay.

Asignificantnumberofrespondentssaidtheywouldfinditeasiertospeaktoafinancialadviserthanuseawebsite,implyingthatbuildingeasy-to-usecustomerinterfacesiskeytosuccess.

Withthenotableexceptionsofat-retirementandmortgages,morethan20percentofrespondentsineachoftheotherfourscenariosalsosaidtheywouldnotwanthelpwiththesedecisions.Inourview,thismakesitclearthatprovidermarketingwillneedtoeducateconsumersaboutthevalueofadviceandtacklelowengagementincluding,butnotlimitedto,financialliteracyandinertia.

Despitetheseconcerns,evenamongthoseunwillingtopay forautomatedadvice,veryfewrespondents(atenthorless)ineachscenariobelievetheirfinancialaffairsaretoocomplexfor a website to handle. While some may well be under-estimating the complexityoftheirfinancialaffairs,thissuggeststhatifproviderscandeviseandpriceappropriateservices,themarketforaffordableautomatedadvicecouldpotentiallybeverylarge.

How do attitudes vary by consumer segment? Weanalysedconsumers’willingnesstopayforautomatedadviceacrosstenkeyvariablesincludingage,incomeandwealthtoidentifywheredemandishighest.Figure7outlinesinsightsfromthisanalysis.

Figure 7. Insights from analysis of consumers’ willingness to pay for automated financial advice by demographic

Source: YouGov 23-24 January 2017, Deloitte analysis.

Income

Demand rises with income

Wealth

For financial planning and investing, demand is consistent across

wealth levels

Pension pot

For pension contributions, demand is greatest among

those with pots of less than £10,000

Gender

Men keener for automated advice

than women

Region

Londoners are keenest for automated advice; people in Yorkshire have least interest

Children

Parents want automated advice more than those

without children

Social media

LinkedIn users keenest; Facebook

users less so

Age

Demand highestamong people

aged 18-44

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Automated financial advice has an older target market than many might assumeAutomatedadviceisoftenassociatedwithmillennials(peoplebornbetween1980and2000)becausethisgenerationisconsideredthemosttech-savvyandouranalysisshowsthatdemandisindeedhighestamongtheyoungestagegroupsinthesurvey.However,wealsofoundthatdemandishighacrossfivescenariosamongthoseaged35-44.Inthecaseofpensioncontributions,43percentofrespondentsaged35-44woulduseautomatedadvicecomparedto24percentand21percentofthoseaged45-54and55+.

Theneedforaffordableadviceisgrowing,withindividualsbeingincreasinglytaskedwithmanagingtheirownsavings,asevidencedbyashiftfromdefinedbenefit(DB)toDCpensions,auto-enrolmentand‘pensionsfreedom’.

Figure 8. Willingness to pay for automated advice by age

Finding life insuranceFinding a mortgageInvesting £80 monthlypension contributions

Investing £11,000Simple financial planning

51%

43%46%

32%

20%

63%

55%

63%

37%

23%

36% 35%

43%

24%21%

39% 40%43%

26%

59%

44%

35%

18-24

Source: YouGov 23-24 January 2017, Deloitte analysis. Samples range from 50-793. Excludes at-retirement due to small samples.

25-34 35-44 45-54 55+

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Automated financial advice has the potential to prove popular among people with high incomesDuetoitslowcost,automatedadviceisconsideredapotentialsolutionforthoseonlowerincomeswhostruggletoaffordmainstreamfinancialadvice.However,counterintuitively,wefoundthatacrossfiveadvicescenariosdemandriseswithincome.Forinstance,51percentofthoseonincomesof£45,000to£70,000woulduseanautomatedfinancialplannerbutonly28percentofthoseonincomeslessthan£15,000woulddoso.Forpeopleonlowerincomes,consumerengagementiskeyasthisgroupmaynotperceiveaneedforfinancialadvice.

Asimilarstoryemergedwhenwelookedatdemandforautomatedadviceacrossdifferentwealthbrackets,withdemandsurprisinglyhighamongthosemostabletoaffordfinancialadvice.Forinvesting,forexample,respondentswith£100,000ormoreinsavingsandinvestmentsarealmostaslikely(36percent)asthosewith£1,000ormore(40percent)tooptforautomatedadvice.Inourviewthisreinforcestheconclusionthatautomatedadviceshouldnotbeexclusivelyaimedatlowerwealthsegments.Indeed,incumbents are right to be worried about the potential for wealthy clients to switch into their lower margin products.

Figure 9. Willingness to pay for automated advice by income

Less than £15,000

Source: YouGov 23-24 January 2017; Deloitte analysis. Samples: 55-262. Excludes at-retirement due to small samples.

Finding life insuranceFinding a mortgageInvesting £80 monthlypension contributions

Investing £11,000Simple financial planning

28%

39%

46%

51%

30%

39%

50% 51%

20%

32%

36%

46%

30%

46% 47%

55%

36%

54%52% 53%

£15,000 to £29,999 £30,000 to £44,999 £45,000 to £69,999

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There is a high demand for automated financial advice on pension contributions among the less wealthyForty-fivepercentofthosewithpensionpotsworthlessthan£10,000wouldpayforautomatedadviceonwheretoinvesttheircontributions.Incontrast,amongthosewithpotsof£75,000ormore,thefigureisroughlyathird.WebelievethismayreflectthelackofadviceandinformationthatispublicallyavailableonDCpensionsforthosewithlessthan£50,000toinvest.Incontrast,there is a plethora of websites aimed at small non-pension investors.Wefeeltherelativelyunderservedlow-pension-wealthsegment is a clear opportunity.

Inadditiontothedemographicgroupsdiscussedabove,webelievethereisscopeforproviderstoidentifytargetconsumersegmentsbasedonother,less-obvious,demographic,socio-economicandculturalfactors.InFigure10wehighlightfourpotentialtargetconsumersegmentswithabove-averagepropensitytopayforautomatedadvice.

Figure 10. Characteristics of potential target consumer segments

Consumer segment

Young high earners Tech-savvy over 45s Small DC pot holders Southern home owners

Definition GBadultsaged18-34 with>£25,000income and>£5,000insavings &investments (excludingpensions andpropertywealth)

GBworkersaged45+who useLinkedinwithpension savingsof>£20,000

GBworkerswithaDC pension and total pension savings<£40,000

GBadultsagedunder50 wholiveinLondonor the South East and own property

Number of consumers in segment

1.2 million 1.2 million 2.6 million 3.0million

Willingness to pay for automated advice (peer average)

56%wouldpayfor automatedadviceoninvesting£11,000(40%)

44%wouldpayfor automatedadviceon converting£30,000 pensionsavingsintoa lump sum and retirement income(40%)(35%amongconsumersaged45+)

45%wouldpayfor automatedadviceon investing£80monthly pension contributions (35%)

45%wouldpayforautomatedadviceonfindingamortgage(38%)

Net wealth excluding pensions and properties (peer average)

20%havenetwealthof£10,000-£30,000(11%)

10%havenetwealthof £100,000-£250,000(5%)

28%havenetwealthof<£1,000(15%)

10%havenetwealthof£100,000-£250,000(5%)

Net property wealth (peer average)

• 63%ownproperty(66%) • 6%ownpropertyworth£20,000-£40,000(3%)

• 82%ownproperty(66%) • 19%ownpropertyworth>£500,000(6%)

• 66%ownproperty(75%) • 13%ownpropertyworth£150,000-£200,000(10%)

25%ownpropertyworth>£500,000(6%)

Pension holdings (peer average)

43%holdaDC pension(23%)

33%holdaDCpension(23%) 7%belongtoaDB scheme(27%)

23%holdindividual pensions(12%)

Value of all pensions (peer average)

48%havetotalpensionwealthof£75,000-£100,000(1%)

8%havetotalpensionwealth of£75,000-£100,000(1%)

N/A 9%havetotalpensionwealthof£20,000-£40,000(7%)

Note:FormoreinformationonpeeraveragesseeEndnote7.Source:YouGov23-24January2017,Deloitteanalysis.Samples:younghighearners(54),tech-savvyover45s,smallDCpotholders(112),southernhomeowners(129).

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3.Theregulatoryperspective

Makingfinancialadvicemoreaffordableandattractivetocustomers,includingthosewithsmalleramountsofmoneyormorebasicneeds,isapriorityfortheFCA.Itispartofawiderpublicpolicyobjectiveofensuringindividualssavemoreandarebetterpreparedfortheirretirement.Regulators,bothintheUKandelsewhere,believethatautomatedadvicecouldplayapivotalroleinachievingthisaim.

Intheory,firms’incentivesshouldbealignedwithregulators’inprovidinganefficientandcost-effectivesolutionwhichmeetscustomers’needsandeffectivelymanagesrisks.Automationalsohasthepotentialtooffersometangibleregulatorybenefits.Onefirmplanningtoofferadviceonastandardandlimitedsetofportfoliostoldusthat,providedfirms“getthealgorithmsright”,automatedadvicecouldactuallybe“compliancenirvana”ensuringbothconsistencyofadviceandaclearautomatedaudittrail.

However,inpractice,marketdevelopmentshavebeenslowerthanexpected,withregulatoryuncertaintyandriskconsistentlycitedinourdiscussionswithfirmsasoneofthemainbarrierstotechnologicalinnovationandautomation.CurrentregulationsintheUK,aswellasinothercountriessuchastheUS,AustraliaandGermany,aredesignedtobe‘technologicallyneutral’-whetheryougiveadviceinpersonorviaawebsite,firmsarerequiredtomeet the same set of customer protection rules. So if the rules arethesame,whytheuncertaintyandaddedrisksinrelationtoautomatedadviceandhowcanfirmsaddressthem?

Inthefollowingsectionsweexplorethisquestionfocusingontheadviceboundary,customercommunications,designandsupervisionofalgorithms,andcyber-resilience.Finally,weconcludeonwhetherautomatedadvicecanoffer‘compliancenirvana’, orwhetherit’sactuallya‘compliancenightmare’.

“Automatedadviceisa‘compliancenirvana’.Ifyougetthealgorithmsright,itcan’tgowrong,unlikewithhumanadvisers.Andthereisanaudittrail.” Deloitte interview with wealth manager, 2016

“Thedistinctionbetweenadviceandguidance,oncereasonablyclear,hasbecomemuchgreyerwiththeadvent of platforms and the potential of roboadvice.” John Griffiths Jones, Chair of FCA, February 2017

The advice boundaryAkeyregulatorychallengeforfirmsinprovidingautomatedadviceisunderstandingwhichsideofthe‘adviceboundary’theyfallon–guidanceorregulatedadvice–andhencewhichregulatoryrequirements apply.

Thischallengeexistswhetherafirmprovidestheseservicesonlineor face-to-face. The reason that this is a particularly thorny issue forautomatedmodelsisthatsomeservicesthatareclosertotheboundaryarenotprofitabletoprovideface-to-facebutcouldlendthemselvesverywelltoonlinedistribution,especiallyforretailinvestmentproducts.

Figure11(seeover)illustrateshowthecostofprovidingtheserviceincreasesasfirmsmovefromprovidingguidancetoregulatedadvice,duetotheadditionalconsumerprotectionrules,increasedcomplianceandoversightcosts,andenhancedliabilitythatapplytoregulatedadvice.Therateofreturnthatfirmsreceivealsoincreases,asthegreatervaluetheyprovidetocustomersthroughregulatedadviceratherthanguidancemeanstheycanchargemoreand/or increase customer loyalty.

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Figure 11. Advice boundary8

Guidance Uncertainty Regulated advice

Revenues Costofdeliveringadvice

Notes:

i)Thefigureisdesignedtoillustratethatthecompliance(andrelated)costsofdeliveringadvicerisesteeply,duetothecurrentregulatoryuncertainty,forthoseservicesclosetotheboundarybetweenguidanceandregulatedadvice.Thisisbecausefirms,unabletodetermineexactlywheretheboundaryis,maychoosetocomplywithmorestringentrequirementsthatapplytoregulatedadvicetomakesurethattheyprotectthemselvesagainstanysubsequentclaimthattheservicetheyprovidedwasregulatedadviceratherthanguidance.Therevenuelineindicatesthat,ingeneralterms,revenueswilltendtoriselesssteeplythanthecosts,ascustomerswillnotbewillingtopayverymuchuntilfirmsofferthemactualpersonalisedadvice.Revenuesandcostslinesinthisfigureareforillustrativepurposesonly.

ii)Wherethischartrefersto‘regulatedadvice’,thismeanscaseswherearegulatedpersonalrecommendationhasbeenmadeandsuitabilityrequirementsapply. SeeEndnote8formoreinformation.

Customers enter information, such as on their outgoings and whether

they are saving for retirement, as part of an online financial

‘health check’, which suggests they consider investing more each month in a stocks and shares ISA

A firm sells products via its website. The website has a filtering

tool which allows customers to filter products by objective factors

(e.g. product type, asset class)

Having suggested that the customer invests more in a stocks and shares

ISA, the tool shows the customer a list of 10 ‘high performing funds’

available within an ISA, with a disclaimer saying that this is not a

personal recommendation

In addition to the filtering tool, the website gives general information

about which kinds of products may be appropriate for people with

different goals (e.g. saving for a car, retirement plans)

Customers are asked a more detailed set of questions, including

on their financial circumstances, objectives and attitude to risk, and

they are recommended specific investment products to buy within

the stocks and shares ISA

The filtering tool allows customers to filter products based on factors relating to their life and situation,

such as goals, age, use of tax wrappers, marital status or other

products the customer has

Cost

of d

eliv

erin

g ad

vice

/rev

enue

s

16


However,firmscurrentlyviewthecostsandriskofprovidingguidanceclosetotheadviceboundaryastoohigh,asregulatoryuncertaintymakesittoodifficultforthemtounderstandwhereexactlytheboundaryis.Toillustratethis,Figure11providessomeexamplesofadditionalservicesfirmscouldprovidetoclients,butwhereregulatoryuncertaintyactsasabarrier.Ingeneral,muchoftheuncertaintyhingesontheamountofinformationthefirmcanaskthecustomertoprovidebeforeittipstheserviceintopersonalrecommendation,andthusregulatedadvice.

So how can this barrier be overcome? Fromapublicpolicyperspective,thereisatrade-offbetweenenablingconsumerswhocannotaffordadvicetoobtainsomehigh-leveldirectiononwhatproductsmayberelevantforthem,andreducingtheriskthataconsumerissteeredtowardsaproductwhichisnotsuitableinthelightoftheirdetailedfinancialcircumstances.

AspartoftheFinancialAdviceMarketReview(FAMR),HMTreasury(HMT)andtheFCAareseekingtofindtherightbalanceandaretakingforwardtwomainactions.9First,theFCArecentlylaunchedthe‘AdviceUnit’,throughwhichitwillsupportfirmsdevelopingautomatedadvicepropositionsthatcanhelpprovidelowcost,highqualityregulatedadvicetocustomersintheareasofinvestments,pensionsandprotectionmarkets.10Itwilldosobyprovidingthemwithregulatoryfeedback,bothindividually(forfirmsselectedtoreceivedirectsupport)andbypublishingpublicresources,includingfurtherguidanceonstreamlinedadvice,startingfromApril2017.11,12

Second,HMTintendstonarrowtheUKdefinitionofinvestmentadviceforregulatedfirmstobringitintolinewiththeEUdefinitioninMiFIDII,sothatnon-personalrecommendations(whichdonottakeintoaccounttheclient’spersonalcircumstances)providedbyregulatedfirmswillnolongerbeconsideredregulatedadvice.13 Thisshouldmakeiteasierforfirmstoprovidemoredetailedinformationtocustomersaboutthetargetmarketorriskprofileoftheirproducts,withlessriskofinadvertentlystrayingintoregulatedadvice.

Bothoftheseactionswillbewelcomedbyfirms.TheirsuccesswilldependinpartonhowmuchclaritytheFCAisabletoprovideinitsguidance and on the extent to which the FCA is prepared to allow firmstoprovide‘semi-personalised’recommendations,i.e.whereafirmgivesacustomerasteerusingbasicpersonalinformationsuchastheirageandgoalsbutdoesnotaskmoredetailedquestionsabouttheirfinancialcircumstances.

Fornow,toavoidundueregulatoryriskfirmswilleitherchoosetostayclearofthe‘greyarea’andprovideservicesthatareclearlyonlyguidanceorregulatedadvice,orerronthesideofcautionandassumetheyareenteringregulatedadviceterritory.Theywillonlydothelatteriftheybelievethattheeconomicbenefits,directorindirect,intheshortandmediumtermofferanacceptablereturnoninvestment.

Customer communicationsAnotherchallengespecifictoautomatedadvicemodelsisthat,withouthumaninteraction,allinformationprovidedtocustomers,aswellasquestionstocustomersandpossibleanswers,mustbespecifiedinadvance.Thecustomerhaslimitedopportunitytoseekclarification,andtheautomatedadvisercannottestthecustomer’sunderstandingthroughconversationorreadingbodylanguage.

“Informationitselfdoesnotnecessarilyempowertheconsumer.Ourworkonbehaviouraleconomicshasclearlyshownitcanoverwhelm,confuse,distractorevendeterpeoplefrommakingeffectivechoices if presented in a way people struggletoengagewith.” Christopher Woolard, FCA director of strategy and competition, June 2015

Inaddition,anumberofweaknesseshavebeenfoundinfirms’communicationsinautomatedadvice.TheFinancialServicesCustomerPanel(FSCP)recentlyreportedthatfirmsofferingautomatedadviceservicesoftendonotuselanguagethatcustomerscaneasilyunderstand,butinsteadusejargonandpotentially misleading explanations.14 The FSCP also found that thelanguageusedbyfirmsoftenassumesanunrealisticleveloffamiliaritywithconceptssuchas‘funds’and‘ISAs’.

The FCA and FSCP found that most customers do not understand the regulatory distinction between guidance andregulatedadviceorthattheseofferdifferentlevelsofprotection.

17


The FCA and FSCP found that most customers do not understand theregulatorydistinctionbetweenguidanceandregulatedadviceorthattheseofferdifferentlevelsofprotection.15 Firms need to communicateclearlywhattheyareoffering,andwhatthismeansforthecustomer.Furthermore,customersmayclickthroughdisclaimerswithoutreadingthemthoroughly,ortheymaynot fullyunderstandthem,andthereforebelievetheyarebeing givenapersonalrecommendation.TheFCAstatesthatif “arecommendationisputforwardinsuchawaythatareasonableobserverwouldviewitasbeingbasedonaconsiderationofa

customer’scircumstancesorpresentedassuitable,thenthisislikelytoamounttoapersonalrecommendation”.16 While the FCA agreesthatacustomer’sperceptionoftheservicereceivedwillnotalwaysbecorrect,firmsareresponsibleforensuringtheytakeallreasonablestepstoavoidanyconfusionormisunderstanding.

InFigure12belowweprovidesomeexamplesonthe‘Dos’and‘Don’ts’forcustomercommunicationsinautomatedadvice and guidance.

Figure 12. ‘Dos’ and ‘Don’ts’ for customer communications for automated advice17

Dos

Considerbehaviouralbiases,e.g.presentbias,lossaversion,overconfidence.Encouragecustomerstothinkabouttheirlong-termfinanceswhenansweringquestionsabouttheirpreferences

Makecommunicationsmorevisual,interactiveandengaging.Thiscanincludetheuseofinteractivevideos

Employbehaviouraltestingtogaugewhethersmallchangesinthewaysinformationispresentedorquestionsareaskedboostsengagement and understanding on the part of the consumer

Testwhethercustomershaveunderstoodtheimplicationsofthechoicestheymakeastheyprogressthroughtheonlineprocess(e.g.byaskingquestions,orspecifyingwhatthefirmisassumingaboutthecustomer)andprovideameansforcustomersto seekfurtherclarifications(e.g.onwebchatorbyprovidingaphonenumber)

Explainclearlythenatureoftheservicebeingofferedandwhatprotectionsareavailabletocustomersifthingsgowrong

Ensure that all important considerations are displayed prominentlywhenprovidinginformationoraskingcustomersquestions

Includelinkstopop-upboxeswherecustomerscanobtainfurther explanations if needed

Don’ts

Usejargon,e.g.‘portfoliomanagement’or‘definedcontributionpensionscheme’withoutaclearexplanationofwhatthe term means

Assumethecustomerknowsthedifferencebetween regulatedadviceandguidance,andtheimplicationsfor consumer protection

Includelongdisclaimersorimportantinformationthatconsumerscan‘tickthrough’withoutreading

Refertodetailedtermsandconditionswithoutprovidingasummaryofkeypoints

Overloadcustomerswithexcessiveinformation

Expressriskonascaleof1to5withoutspecifyingwhatthismeans in practice

Keepriskdisclosurestotheendofthecustomerjourneyoronlyin follow-up sales documentation

18


Automatedadviceprovidesanopportunityforfirmstomaketheirriskprofilingprocessesmorevisual,interactiveandengaging.Somefirmsareevenexperimentingwithvirtualrealitytechnologytobringinvestmentdecisionstolife.Forexample,StockCity,byFidelity,isavirtualcitywhichhelpsclientsvisualiseaninvestmentportfolio.18 Eachbuildingintheskylinerepresentsastock;itsheightrepresentsthepriceofthestockintheinvestmentportfolio,whileitswidthrepresentsthenumberofoutstandingshares.Theskylineofthecitychangeswiththefluctuationsinthemarket–adownturnwillcausearainstorm,whileasunnydaymeanssharepricesarerising.

TheFCAisworkingwiththeindustrytoimprovetheclarityofcustomer communications through its Smarter Communications work.19Webelievefirmsshouldproactivelycontributetothedevelopmentandimplementationofindustrybestpractices.Theyshouldalsouseinsightsfrombehaviouraleconomicsandundertaketestinginthedesignoftheircustomerinterface,takingintoconsiderationcustomers’vulnerabilitiesandcognitivebiasesand heuristics which can result in customer responses being influencedbythewaythatquestionsareframed.

Note:Figure13showsbehaviouralbiasesthatcanpreventcustomersfrommakingrationalfinancialdecisions.Behaviouralbiasesarenotalignedwithspecificpotentialsolutions. This is because in certain cases potential solutions relate to more than one bias.

Figure 13. Opportunities to deploy behavioural economics in automated financial advice

Provide customer with comparisons vs. peer groups, e.g. savings rate, accumulated wealth. Make advice communications highly personalised so that customers understand their unique needs.

HerdingSeeking comfort from ‘being with the crowd’.

Use websites to present customers’ wealth in an integrated manner that removes inappropriate segregation between mental accounts.

Mental accountingAllocating wealth to different mental accounts and treating them differently when it may be inappropriate to do so, e.g. an ISA may be more valued than a pension because it is more accessible.

Provide advice on ‘micro-journeys’, i.e. short decision-making processes. Deploy advice through easy-to-use mobile apps.

Financial loss aversionAversion to ‘losing’ leads some people to make sub-optimal investment decisions, e.g. taking too little risk. Proactively contact investors that display behavioural

biases. Educate investors with tools that demonstrate the impact of biases. Tailor advice depending on the propensity of the customer to display biases.

Status quo biasPreferring to stick with the current situation, e.g. not taking advice, not updating life insurance.

Anchor customers’ savings and investment decisions based on prominent and appropriate targets. Use gamification to make chasing goals fun and engaging.

OverconfidenceMaking overly optimistic assumptions about one’s financial future.

Proactively contact customers in advance of when they need to take action, e.g. automated alerts to review finances before life events.

AnchoringMaking decisions based on an arbitrary reference point.

Hyperbolic discountingPreferring smaller payoffs now over larger payoffs later.

Educate customers using online tools that demonstrate realistic assumptions, e.g. projected level of retirement income.

Time loss aversionAversion to ‘losing’ time on administration tasks such as managing finances.

Behavioural biases Potential solutions

19


Design and oversight of algorithms Thekeysuccessfactorforanyautomatedadvicemodelisthestrength of the algorithm underpinning it. Flaws in its design and poorgovernancemayresultinwidespreadmis-selling,whichbothfirmsandregulatorsareunderstandablykeentoavoid.

Thereforethewayalgorithmsaredesigned,approvedandreviewedisanewandkeyriskforfirmsdevelopingautomatedadvicemodels.

“Wehaverulesaboutwhatsortofexamsahumanadvisermustpassbeforetheyarequalifiedtoadvise;howwouldweapplythesetoanalgorithm?!” Mary Starks, Director of Competition, FCA, June 2016

AustralianandUSregulatorshavealreadypublishedsomeguidance in this area. Firms can use these sources to inform their thinkingandplans.20,21 Parallels and commonalities can also be foundwiththeMiFIDIIrulesoncontrolsforalgorithmictradingandthesupervisionofinternalmodels.

“Ournumberoneconductriskconcernis the potential for mis-selling en masse.Tomitigatetherisk,thedigitalsolution should recognise when it is no longer appropriate to proceed with the customeralongthejourney.” Deloitte interview with insurer, 2016

1 Aqualifiedadvisershouldalwaysbefullyinvolvedinthedesignprocess,andberesponsibleforunderstandingtheassumptionsandlogicembeddedinthealgorithmineachpotentialscenario,andwhethertheseprovidegoodcustomeroutcomes.

2 Firmsshoulduseafullsetofskillsinthedesignofalgorithms,includingIT,modernportfoliotheory,andbehaviouraleconomics to understand any potential biases in the collection andanalysisofcustomers’data.

3 Exit chutes should be coded into algorithms so that customers whodisplayabnormalbehaviours(potentiallyvulnerablecustomers)orcustomerswithcomplexneedscanberedirectedto human interaction.

4 Governancecommitteesoverseeingautomatedadviceshouldincludeamixofcompliance,technologyandbusinessleadership.Executivemembersshouldbetrainedtounderstandtherisksofusingalgorithms,establishthemetricstobuildintothetestingandqualityassurance(QA)reviewsandregularlyreviewsystemsperformanceandsignoffanychangesrequired.

5 Firmsshouldconduct,anddocument,robusttestingofalgorithms,alwaysinanon-liveenvironment,beforeanyadviceisprovidedtoaclient,andalsosubsequently.(SeeBox1)

6 FirmsneedtoensurethatstaffintheirRisk,ComplianceandInternalAuditteamshavetheskillsneededtounderstandthealgorithms,andsufficientskillstofollowuponinformationprovidedbyautomaticalerts.

7 Firmsshouldhaveclearlinesofaccountability,includingaclearlyidentifiedownerforeachalgorithm,andadequatehumanandtechnologicalresources,throughoutthedevelopment,testing,deployment,monitoring,reviewingandupdatingofalgorithms.

8 Firmsshouldconsiderdeployingalgorithmsgradually,i.e.toalimitednumberofclients,toensuretheyareworkingasexpected.Theirperformanceshouldbecloselymonitored,andthefulldeploymentshouldbesignedoffonlyifQAmetricsarefully met.

9 Thealgorithmownershouldbeinchargeofinitiatingthereviewandupdatingalgorithmswhenevertherearerelevantfactorsthatmayaffectthemand,inturn,thecustomers(e.g.marketorregulatorychanges).

10 Firmsshouldhaveeffectivecontrolsandprocessesinplacetosuspendtheprovisionofadviceifanerrorwithinanalgorithmisdetected.Theyshouldalsoperformamanualreviewofanyadviceprovidedbeforetheerrorwasdetected.

11 Thefirmshouldbeabletoexplaintotheregulatorshowthetoolworksandhowitcomplieswithregulatoryrequirementsandthefirm’sriskappetite.Firmsshouldalsobeabletoprovidedetailsoftheparametersorlimitstowhichthesystemissubjectandthekeycomplianceandriskcontrolsthatareinplace.

Belowisasummaryofsomeoftheessentialprinciplesfirmscanconsiderapplyingwhenestablishingaframeworktodesign,governandsupervisetheiralgorithms.22

20


Box 1 – FINRA principles and effective practices for governance and supervision of algorithms

Initial reviews • assessingwhetherthemethodologyatooluses,includinganyrelatedassumptions,iswell-suitedtothetask.

• understanding the data inputs that will be used.

• testingtheoutputtoassesswhetheritconformswithafirm’sexpectations.

Ongoing reviews • assessing whether the models a tool uses remain appropriate asmarketandotherconditionsevolve.

• testing the output of the tool on a regular basis to ensure that it is performing as intended.

• identifyingindividualswhoareresponsibleforsupervising the tool.

“Peopleoftentalkaboutautomatedadvicebeinganinnovationintheadviceprocess,butitalsorequiresinnovationinriskandgovernancepractices.” Deloitte interview with insurer, 2017

Cyber-resilienceFirmslookingtodeveloponlineplatformstoprovideadviceshouldconsidercyberasoneoftheirlargestrisks,bothfromaregulatoryandreputationalperspective.

Fromaregulatoryperspective,firmsshouldensurethattheyhavesufficientlypreparedthemselvesinthreeprincipalareas:23

• risk identification and management–firmsshouldbeabletodemonstrate that they understand the extent of their exposure tocyberandITriskatalllevelsoftheirorganisation

• risk governance–firmsshouldhaverobustinternalgovernancemodelstocopewiththecomplexityandpervasivenessofcyberrisk

• risk resilience–firmsmustdemonstratethattheyhavedevelopedcontingencyplansandcapabilitiestorespondeffectivelytocyberbreachesinawaythatallowsthemtominimise disruption to customers.

Cybersecurityandresiliencearekeyconsiderationsforallinternet-basedcustomerplatforms,notonlyforautomatedadvice.However,firmsbuildingacustomerplatformforthefirsttimewillneedtoensurethatcyberrisk,includingclientdataprotection,isatthetopoftheexecutiveagenda.

Compliance nirvana or nightmare? Automatedadvicefacesdifferentandinsomecasesmorecomplexregulatory challenges than traditional face-to-face channels. Firmswillneedtoadjusttheirriskandcontrolframeworksandmanagementinformationtoreflectthedifferentcustomerjourneysandtoidentify,reviewandmanagethedifferenttypesofrisksautomatedadvicepresents.However,thechallengesinrelationtoconsumercommunications,useofalgorithmsandcyberriskaresurmountableandtherisksmanageable,consistentwiththe analysis set out in this paper.

Atthesametime,automatedadvicealsogivesrisetoregulatorybenefits.Itallowsfirmstomaintainconsistencyofadvice,itprovidesanaudittrailofcustomerinteractionsaspartoftheadviceprocess,aswellasanopportunityforfirmstomakecommunicationsmorevisual,interactiveandengaging,includingthroughexploringtheuseofvirtualrealitytechnology.

OnemajoroutstandingquestioniswhethertheFCAwillbeabletotackletheregulatoryuncertaintyovertheadviceboundarytoanextentwhichmakesfirmswillingtoofferservices‘attheboundary’.WebelievethattheFCA’sworkinthisareawillreduceuncertainty,buteliminatingitentirelywillbechallenging.Ultimately,theFCA’sdecisiononexactlywhatconstitutesregulatedadvicewillbedeterminedbythebalanceitiswillingtostrikebetweenitsconsumerprotectionobjectiveanditsambitiontomakeguidancemorewidelyavailableandaffordableacrossallsegmentsofsociety.

Inconclusion,therefore,whileautomatedadvicepresentsno‘compliancenightmare’,thereisstillsomewaytotravelbeforewereach‘compliancenirvana’.

21


Automatedadvicealgorithmscanalsobedesignedwiththeabilityto‘learn’.Inmachinelearning,anapplicationofthebroaderconceptofArtificialIntelligence(AI),computerprogramscanbetrainedbysubjectmatterexperts(SMEs),suchasqualifiedadvisers,torespondtosituationswithoutbeingexplicitlyprogrammed and to change their response when exposed to new data.

OnceSMEscompletethetraining,andlearningalgorithmshavebeenproperlytested,theabilityto‘learn’can(andshould)beswitchedoff,beforetheseAIapplicationsaredeployedtointeractwithconsumers.Atanypointfurtherlearningcanberesumed,in‘offline’mode,byfeedingthecomputerneworadditionaldata.

AsAIapplicationsevolveandincreaseinsophistication(forexample,improvetheirabilitytounderstandandrespondinnaturallanguage),machineswillincreasinglybeabletoreplicate human interaction. Although the regulatory and legal requirementsunderwhichadviceisgivenshouldbecodedintothealgorithmratherthanlearnedovertime,machineswillbeabletohaveprogressivelymorecomplexconversationswithclientsto,forexample,understandtheirpreferencesortesttheirlevelof comprehension. Machine learning is already being applied successfully,particularlyinbusiness-to-businessandfunctionsthatdonotrequirecustomerinput(e.g.portfoliorebalancing).Thefirstinsurancechatbothasalreadybeenlaunched(Spixii),andAmazon’sAlexacanprovideinformationonannuitiesforinstance.24,25,26

AlthoughfirmshaveamuchgreaterabilitytocontrolandtestAIapplicationsthaniscommonlybelieved,regulatorswillbewatchingdevelopmentsclosely.Theprinciplesfordesign,governanceandsupervisionwediscussedinSection3applytobothlearningandnon-learningalgorithms.However,forlearningalgorithms,thereneedstobeastrongfocusonthepoliciesgoverningthequalityofdatafedtothealgorithm,thetype,extent,andlengthofthetraining and the criteria for testing the algorithm.

Underthisscenario,automatedadviserscouldbeabletoprovideadviceagainstarelativelycomplexsetofneedsandgoals,andenhancefirms’abilitytoprofilecustomersand‘test’theirunderstandingofbothproductsandthepotentialrisks.AIwillalsobeabletomonitorandunderstandverycomplexandregularlychangingregulations,probablymuchmoreeffectivelythananysinglehumanadvisercould.Overthenextdecade,therefore,itispossiblethatwewillseeautomatedadvisersentermoresophisticatedadvicemarketsandbeabletodealwithissuesascomplexastaxandholisticfinancialplanning,thusprovidingservicesforwealthiercustomersegments.

Havingsaidthat,thetransitionwillbegradualandprobablyonlypartial,notonlybecauseAItechnologiesarestillrelativelyimmature,butalsobecauseitwillrequireachangeof‘heartsandminds’onthepartofconsumers.Someofthereticenceisgenerational,butsomeisrootedinthehumanneedforformingbondsoffriendship,trust,andempathy.

4.MachinelearningandArtificialIntelligence

22


Part 2 Automatedfinancialadvice–aviewofindividualmarketsIn Part 2 we discuss the opportunities arising from automated advice, the barriers and the implications for industry players across the following markets: simple financial planning, investing, DC pension saving, at-retirement, mortgages and individual protection. We then draw out our overall conclusions and the next steps for firms.

As in Part 1, where we refer to ‘automated advice’, this includes regulated advice, guidance and discretionary investment management, which can be delivered via a purely automated system, a hybrid service or face-to-face assisted by an algorithm. Where we refer to specific services or channels we use specific terms such as ‘regulated advice’ or ‘purely automated’.

2323

New horizons | The future of automated financial advice in the UK

The opportunityWebelievethereissignificantunsatisfieddemandforanautomatedfinancialplanningproductortooltohelpwitharangeoffinancialdecisions,especiallyamongyoungermillennials.Consumersneedguidancerangingfrom‘micro-journeys’–bywhichwemeanfinancialdecisionsthatcanbemadebasedonshortadviceprocesses–allthewaythroughtoholisticfinancialplanning,whichtakeslongerandismoreinvolved.Micro-journeysvarybyageandlife-cyclestage.TheyincludedecidingbetweenpayingdowndebtandsavingintoanISA,guidanceonbuildingadepositforahouseandchoosingbetweeninvestmentswithinanISA.

Oursurveyshowsthat34percentofrespondentsarewillingtopayforanautomatedsolutionforfinancialplanning.Weviewthisfigureashigh.Financialengagementandliteracyamongconsumers,whichdrivesinterestinfinancialplanning,isgenerallylow.Moreover,whilesomesuchtoolsareavailableinthemarketplace,awarenessislow.

Pricesensitivityamongtheconsumerswhowoulduseautomatedfinancialplanningishigh.Morethan70percentofrespondentswouldnotpaymorethan£125forthisservice,whichislessthanaquarterofthecostofatypicalfinancialplanningsessionwithanadviser(seeFigure14).27

What are the barriers?Commercialviabilityisthekeyquestionforproviders.Youngermillennialsshowthehighestappetitetouseautomatedfinancialplanning,buttheirsavingsandabilitytopayforadvicearelowrelativetoolderconsumers.Marketingcostswouldneedtobehightoovercomelowconsumerengagementinfinancialmatters,andtheneedtoachievesignificantscaletooffsetlowfees.

Thecombinationoflowfeesandhighmarketingcostsmaketheeconomicschallenging.However,giventhesignificantunsatisfieddemandamongselectgroupssuchasyoungermillennials,offeringafinancialplanningtoolcouldbeapointofdifferentiationforprovidersandameansofgatheringvaluableconsumerdataandincreasingcustomerloyalty.Thiswouldhelpproviderswhoearnconsumers’trusttomarkettotheminfutureyears.Asaresult,somelargerproviderscouldconsiderprovidingfinancialplanningguidance for free or at-cost.

Webelievethereissignificantunsatisfieddemandforanautomatedfinancialplanning product or tool to help with a rangeoffinancialdecisions,especiallyamong younger millennials.

A.Simplefinancialplanning

Key findingThere is strong appetite for automated tools among younger millennials to guide simple‘micro-journeys’suchaschoosingbetweeninvestinginanISAandpayingdowndebt.Thecommercialviabilityoftheseservicesisquestionablegiventhelowabilityofthesecustomerstopay.However,largeinstitutionsmayprovidetheseservicestoengagewithandwintheloyaltyofthesecustomers.

24


Figure 14. Willingness to pay for automated advice for a financial review

0% 10% 20% 30% 40% 50% 60% 70% 80%

£500

£475

£450

£400

£250

£125

Less than £125

Source: YouGov 23-24 January 2017, Deloitte analysis. Sample: 697 GB adults who would pay for automated advice for a financial review.

72%

11%

9%

4%

0%

1%

3%

Itiscurrentlydifficulttoprovideaholisticautomatedadvicesolutionforfinancialplanningduetocomplicationssuchastaxandinheritanceplanningwherehumanoverlayisnecessaryatpresent.Inaddition,theshorterattentionspanofmostpeopleinadigitalenvironmentwilllimitthenumberofdetailedquestionstheycanbeaskedrelativetoface-to-faceadvice.However,automatedadviserscanprovidetoolstohelpsimplermicro-journeys,suchaschoosingbetweenISAandpensioncontributions.Adigital-onlysolutionismostlikelytosucceed,withahybridsolutioncombiningdigitalandface-to-faceadviceofferedformorecomplexcases.

IntheUK,adviceisregulatedifitinvolvesrecommendingspecificfinancialproducts.28Whereafirmprovidesregulatedadvicetocustomersbasedontheirindividualcircumstances,thefirmwillbesubjecttosuitabilityrequirements.Iffirmsareshowntohavegivenunsuitableadvicetheyareliabletopayredressandpotentiallyregulatoryfines.However,manymicro-journeys,suchasdecidingwhethertoinvestinanISAorapension,orworkingouthowmuchdepositaconsumerneedstobuyahouse,donotinvolverecommendingspecificfinancialproductsandareonlyregulatedifprovidedalongsideregulatedadvice.Wherefirmsprovideonlyunregulatedservices,theyshouldfacesignificantlyreducedcompliancecosts.Theseservicesmayprovidefirmswithfeweropportunitiestochargecustomersortoselltheirproducts,butcan build customer loyalty.

Wherefirmsprovideregulatedpersonalrecommendationsonretailinvestmentproducts(includinginsurance-basedinvestmentsandpensions),UKrulesrequirethistoberemuneratedthroughadvisercharges.Firmswantingtoprovideregulatedadviceforfreeor below cost will therefore need to consider carefully how this could be funded. More detail on this is set out in Section B.

Implications for industry playersBanksarerelativelywellpositionedbecausetheyhaveunrivalledaccesstomassmarketcustomersandcustomerdata.Theyhavetheabilitytoofferfinancialplanningguidanceasafreeorlow-costsolutiontobuildcustomerloyalty.Moreover,theircustomeraccesssolvesthechallengeofhighcustomeracquisitioncosts.Forbankstoexploitthisopportunityfully,thekeywillbedevelopinganddeployingtherighttoolstoanalysethisdata,whichmayhavetobewith a FinTech partner.

Employerscouldofferonlinefinancialplanningasabenefittotheiremployeesviaafinancialservicesprovider.Massemployerssuchasretailersareuniquelypositionedtoofferthisservicetotheiremployees,againside-steppingthecustomeracquisitioncostproblem.However,theiraccesstoemployeefinancesislimitedtosalaries.Asolutionwouldneedaccesstonon-incomefinancialdatasuch as on borrowings and outgoings. Trust could be a barrier here.

Technology-enabledstart-upsmaybebestpositionedtoprovideengaginginterfacestoencourageadoption,besidesprovidingthetechnologyforanysolution.Ongoingchangesinregulation,suchasPaymentServicesDirectiveII(whichmandatestheopeningupofbankdatatothirdpartieswithcustomerconsent),willhelpthemaccessdata.However,thisstilldoesnotsolvetheproblemofveryhigh customer acquisition costs that any stand-alone start-up will face due to low brand recognition.

25


The opportunityWebelievethereisasignificantunsatisfieddemandforefficientwaystoinvestsmallersumsofmoney,bothregularcontributionsaswellaslumpsums.Alltoooften,individualsareeitherriskaverse,preferringtoholdtheirsavingsincash,orlacktheunderstandingtoinvesttheminpotentiallyhighergrowingoryieldingassets.Themarketisverysignificant,with£828billionheldinindividualdepositsathighstreetbanksasofDecember2016.29 CashISAsaloneaccountedfor£269billionoffundsinthe2015-16taxyear,andinflowsintocashISAsamountedtoaround£60billioninboththe2014-15and2015-16taxyears.30Thelevelofinflowsislikelytoincreasefurtherinthe2017-18taxyear,withtheincreaseintheadultISAallowancefrom£15,240to£20,000.

“Automatedadvicewouldallowustoexpandourservicestoawiderrangeofclients,byloweringthesumneededforinvestableassets.” Deloitte interview with UK-based wealth manager, 2016

Fortypercentofrespondentsinoursurveywouldpayforautomatedadvicetohelpwithsuchinvestmentdecisions.Thisisremarkableinthecontextoflowengagementandfinancialliteracy,andintheabsenceofanymajorinitiativesbyUKincumbents.

“Thereisacustomersegmentthatispricesensitiveyetwealthy.Theyunderstandtheimpactoffees,areseekingvalueandarewillingtopayforautomatedadvice.You might see large sums allocated to automatedadvice,representingsmallsharesofwealthyportfolios.” Deloitte interview with UK-based fund manager, 2016

Wealthmanagerstypicallyhaveminimumclientaccountsizesabove£500,000andtheseaccountminimumsarerisingformany players.31Thecostofprocuringhumanadviceat£150perhouronaveragemakesitprohibitivelyexpensiveforsumsbelow£100,000tobeinvestedwithadvice.32However,evenamongwealthierinvestors,costconsciousnessisrising.Webelievethatmanywillallocateaportionoftheirassetstobemanagedpassivelythroughalowcostdigitaladviser.IntheUS,theevidenceshowssizeablevarianceinthedigitaladvicemarket–averageaccountsizesrangefrom$26,410atBettermentto$145,989atPersonalCapital.33Oursurveyresultsbackthisup,showingaclearappetiteamongwealthierinvestorstoinvestrelativelylargesumsofmoneythroughautomatedchannels.Infact,willingnesstopayforautomatedadvicetoinvest£10,000clearlyriseswithwealth(seeFigure15).

B.Investing

Key findingThereissignificantdemandacrossthewealthandincomespectrum,notjustfromthoselookingforalow-costsolutiontoinvestsmallersumsofmoney.Theresultingchallengeforindependentfinancialadvisers(IFAs),wealthandassetmanagerswillbemarginpressurefromthepotentialswitchingintolower-feeautomatedadviceproducts from higher-fee products.

26


Thosewillingtouseanautomatedadvicesolutionareclearlypricesensitive(seeFigure16).However,webelievelowcostsolutionsarecommerciallyviable.Morethantwofifthsofrespondentswhowouldpayforautomatedadvicewouldpaylessthan£100.Forlargescaleproviders,thispricepointmaybeachievableasevidencedbyannualmanagementchargesof45basispointsperyearonaccountswithfundsupto£250,000atHargreavesLansdown.34Forexample,acapitalsumof£22,000chargedat45bpswouldgenerateaproviderfeeof£100.

We recognise that a digital asset allocation solution using mainly passiveinvestmentsislikelytobethebestmeansofofferinglow-feeautomatedadvicethatachievesacceptablereturnsforproviders.Forwealthierinvestors,thissolutionmayalsoincorporateactiveinvestments.However,offeringsuchaproductposescleardangersforincumbentwealthandactiveassetmanagers:acorollaryoftherisingpopularityofsuchaplatformisevenmoreattentiontofees.While a substantial element of the business generated will be new totheindustry(i.e.moneythatwasheldincash),therewillbesomeswitchingfromhighermarginaccountsandactiveproducts.

Figure 15. Willingness to invest more than £10,000 using automated financial advice by wealth level

£100,000 or more£30,000 or more£5,000 or more£1,000 or more

13%15%

19%

28%

Source: YouGov 23-24 January 2017, Deloitte analysis. Samples: GB adults with more than £1,000 in savings and investments (excluding pensions and property wealth). Samples: £1,000 or more (1,046), £5,000 or more (842), £30,000 or more (461), £100,000 or more (212).

Figure 16. Willingness to pay for automated financial advice for investing £11,000

0% 10% 20% 30% 40% 50%

£450

£430

£405

£360

£225

£100

Less than £100

Source: YouGov 23-24 January 2017, Deloitte analysis. Sample: GB adults with more than £5,000 in savings and investments (excluding pensions and property wealth) who would pay for automated financial advice for investing £11,000 (335).

42%

28%

16%

6%

3%

4%

2%

27


What are the barriers?Wenotethatprovidermarketingwillalsoneedtoconvincepotentialclientsoftheneedtoinvestmoneyinhigherreturnassets as well as educate and reassure them about the capabilities of their automated products.

Lowthresholdswillbekeytoattractingconsumersfromthelesswealthytargetmarketwhodonothaveaccesstotraditional,higher-endwealthmanagers.Inaddition,lowfeesarevitaltobringintheprice-sensitiveconsumerswhoinhabitallsegmentsofthewealthspectrum,asshowninFigure16.However,customeracquisitioncostswillbehigh,especiallyfornewentrantsandthosewithlittle/nobrandawarenessinthismarket.

Asaresultofthesefactors,makingaprofitonstand-aloneautomatedadvicebusinessischallenging,particularlyintheearlyyears.Weestimatethatastand-aloneautomatedadvicebusinessislikelytoneedanywherebetween£4billionto£10billioninassetstobreak-even(seeFigure17)skewedinalllikelihoodtowardsthehigherendofthatrange,alevelsubstantiallyhigherthanwherewearetoday.

Somefirmsdevelopingregulatedautomatedadvicemodelsmaywanttooffertheirservicesbelowcost,orforfree,onanongoingbasistoimprovetheiroveralloffering.FirmswantingtodothiswillneedtoconsidercarefullytheirapproachsincetheFCA’srulesstatethatafirmcan only be remunerated for a personal recommendation on retail investmentproductsbyadvisercharges.35,36

Thisisanareawheremoreregulatoryguidancewouldbebeneficial,andfirmsmayneedtoseekfeedbackontheirproposedapproachfromtheFCA.Inanycase,firmswouldatleastneedtoensurethatcustomers of other business lines did not face higher costs as a result ofautomatedadvicebeingprovidedforfree.Ifaserviceisclearlyguidance,itcanbeprovidedforfree,asguidanceisoutsidethescopeof these rules.

Implications for industry playersAssetmanagerslargelyseethemselvesas‘manufacturers’ofinvestmentproducts.FewhavesizeableD2Cbusinesses,andmost are reluctant to spend the money to build a brand with highrecognitionamongmassmarketconsumers.However,rapidadoptionofdigitaladvicehasthepotentialtoaccelerateanongoingshifttopassiveinvestments.Tomaintaingrowth,assetmanagerswillneedtofocuseitherondifferentiatedproductsand/orfindawayofparticipatinginthischangethrough,forexample,buildingorpartneringtocreateaD2Croute.Thisraiseschannelconflictissuesthattheywillneedtoresolve.Assetmanagerstypicallygothroughintermediaries,suchasplatforms,banksandwealthmanagers,andanymoveintodirectdistributionwouldbringthemintocompetitionwith these established distribution channels.

-20

0

20

40

60

80

100

120

20,00015,00010,0007,5005,0003,0002,5002,0001,5001,000500100

Source: Deloitte analysis

With net fees of 50 basis points and the average account starting at £35,000 break-even is £5-7 billion

With net fees of 75 basis points and the average accountstarting at £35,000, break-even is £4-5 billion

With net fees of 35 basis points and the average accountstarting at £35,000, break-even is £7.5-10 billion

Assets under management (£ million)

Figure 17. Estimated break-even assets under management for a UK stand-alone automated advice platform37

Profi

ts (£

mill

ion)

28


Retailinvestmentplatformsandwealthmanagersarethebestpositionedtoaddondigitalinvestmentadviceservicesgiventheir branding and direct access to consumers. They can add this serviceatrelativelylowincrementalcost,althoughtheywillneedtobuild or buy technological expertise.

Retailinvestmentplatformsareespeciallywellplaced,astheycanattractbusinessawayfromwealthmanagerclientslookingforlower-pricedpassivesolutions.TheUSprovidesevidencethatthisisalreadyhappening.Weestimatethatbetweenthem,twolargeinvestmentplatformshavealreadycapturednearly80percentofthedigitaladvicemarket.38 While select challengers are continuing togrow,incumbentsaregrowingjustasfastbytargetingpotentialentry-levelwealthmanagerclientsattractedbytheirlowerfees.Theimportanceofscalesuggeststhatevenamongincumbentsfewwillbesuccessfulinthischannel:HargreavesLansdownleadsthecurrentD2Cmarketbysomedistanceandhasbeenunrivalledin its success at building a D2C channel with a widely recognised brand.

Wealthmanagerswill,however,needtobemindfulofcustomersswitchingfromhighermargin,activeandadvisedproductranges,tolowermargindigitally-advisedproducts,amidhigherfeetransparency. One option for wealth managers to protect their brandsistolimitaccountminimumstorelativelyhighamountsandofferanadded-valuehybriddigital-humanproduct,suchasadedicatedhumanadviseraboveaminimumaccountsize.

“Investmentexpertiseandsafecustodyare important in a business that depends mainly on trust. This is where incumbentshaveahugeadvantage.” Deloitte interview with UK-based wealth manager, 2016

Forwealthmanagerclients,givenothercomplexitiessuchastaxefficiency,inheritanceandbroaderriskmanagement,adigitalsolutionmay,inanycase,beonlypartofawiderallocationofassets.Overtime,thefocusoftheadvisermayshifttowardsincorporatingnon-investmentmatterssuchastaxplanningintotheinvestmentsolution.Wealthmanagerswhowishtowidentheirreachbeyondtheirexistingclientcharacteristics,giventheirtypicallynicheaudience,willalsohavetospendsignificantamountson customer acquisition costs.

IFAs,inparticular,lookvulnerableintermsofbothfeepoolsaswellasthescopeoftheirtasks.Webelieveretailinvestmentplatformsarewellpositionedtooffermassaffluentclients(withinvestableassetsof£50,000to£250,000)competitiveoffersthatcouldpressureIFAfees.Withtheavailabilityofdigitaltoolstomanageportfolios,theroleofIFAswillshifttowardsareassuchastaxoptimisationandestateplanning,andthegradualnarrowingoftherangeoftaskstheyperformcouldplacefurtherpressureonfees.

Givenbanks’accessandongoingrelationshipswiththeircustomers,targetinginvestorswithsmallsumstoinvestisanopportunitywitharelativelylowacquisitioncost.However,thechallengesherearelikelytobelowfinancialliteracy,highriskaversionandtheneedtokeepthissolutionaffordable.Banksarealsolikelytoneedtobuyintechnologysolutionstoprovideandservicethisoffer,andgrafttheseontotheirlegacysystems.Thatsaid,thiswillbelargelyincrementalbusinesstobanks,whetherbuiltthroughpartnershipsorinternallyandwillbeausefultooltodifferentiatetheiroffer.Theabilitytoviewandmanageinvestmentsonthesameplatformasday-to-daybankingwillappealtomany,andbanksareinpolepositiontoprovidethis.IntheupcomingeraofOpenBankingwherebybankswillberequiredtosharecustomerdatawiththirdparties,addingtheseservicesoffersbanksawayofimprovingcustomerengagementratherthanbeingonthedefensive.

Start-upshavecertainlyledthewayintermsofdeliveringdigitaladvicemodelsthatcandealwithsmallersumsofmoney.Theirfocus has generally been to attract customers through lower fee products,enabledbytheirdigitalplatforms.Whileeveryonewillbeinfavouroflowerfees,engagementwithinvestingisverylowand,inthatcontext,trustintheirfinancialproviderisakeydesiredtrait.Asaresult,customeracquisitioncostsforstart-upsaremagnifiedtouneconomiclevelsbythegenerallyultra-lowawarenessofstart-upbrandsamongallbutthemostdigitallysavvyinvestors.Westruggletofindexamplesofthosethatcanovercomethiskeychallengeandbuildscale.Thus,webelieve,barringaselectfew,amoreviablesolutionislikelytobeeithertopartnerwithortosellincumbentstheirservicesasawhitelabelproduct.

29


The opportunityTheUKDCpensionmarketishuge,withmorethan£650billioninestimatedassetsundermanagementandannualprofitsin the region of £1.6 billion.39Inaddition,theUKDCmarketisgrowingquicklyduetoacombinationofpopulationageing,auto-enrolment and the continuing shift from DB to DC pension schemes.WeestimatethattheUKDCprofitpoolwillgrowataround6percenteachyeartoabout£3billionby2025.40

Thedominantworkplacepensionprovidersaretypicallylargeinsurersandassetmanagers.Inourview,automatedadviceonworkplacepensionspresentstwomajoropportunitiesforincumbents to defend their dominant position in DC pensions.

Thefirstopportunityistoincreasecustomerengagement.ManypeoplearedisengagedwiththeirDCpensions.Forinstance,only52percentofDCsavershaveafairlygoodideaofhowtheirfundsareinvested.41 This leads to sub-optimal outcomes. Most obviously,DCsaverssavetoolittleandtaketoolittlerisk,bothof which inhibit the growth of their pension pots. Others fail to maximisetheirtaxbreaks.Nevertheless,theintroductionofthePensionsDashboard,startingwithapilotfromMarch2017,willenablepensionsaverstoseealltheirpensionpotsinoneplace,which could increase engagement.42 We see three main ways in which automation can further increase engagement.

• More proactive.Automatedalertscankeeppeopleupdatedabouttheirbalances,theincometheyareduetoreceiveinretirementandletthemknowwhennewfundsbecomeavailabletoinvestin.Reminderstoreviewsavingsratesand/orinvestmentchoicescanbeissuedperiodically,andchasedupifnoactionistaken.Justunderaquarter(23percent)ofoursurveyrespondentswhohavenotretiredsaidtheywouldlikeonlinehelpunderstandinghowmuchmoneytheyareontracktoreceiveinretirement.

• More accessible.Providerscanmakepensionsavingmoreaccessiblebyusingvisualtoolswithinautomatedadvice.Forexample,visualsthatillustratekeypointssuchasthebuild-upoffundsovertime,theinfluenceofriskonreturnsandprogressagainstgoalswouldlikelyprovemoreaccessibleandengagingthan paper-based communications.

• More powerful.Providerscanuseinsightsfrombehaviouraleconomicstomaketheircustomercommunicationsmorepowerful(seeourdiscussiononcustomercommunicationsinSection3).Researchfoundthathouseholdscuttheirenergyconsumption when they compared it with that of neighbours. The samethinkingcouldbeappliedtopensionswithsaversshownanonymised real life examples of how their peers are doing.

Thesecondopportunityistoimprovepensionsavingdecisionsbymakingadvicemoreaffordable.TheaverageDCpotatretirementis£25,000,thoughmanypeoplehavemultiplepotsandothersources of wealth.43Yetmanyfinancialadviserswillturnawayconsumerswithlessthan£50,000.Fortheseconsumers,thecostofadvicewoulduseuptoomuchoftheirpotstobeworthwhile.

C.Definedcontributionpensionsaving

Key findingDCpensionsareauniqueopportunityforautomatedadviceduetoalargeandfastgrowingmarket,accesstocustomersthroughthetrustedandlow-costworkplacechannelandalackofpublicallyavailableinformationonhowtoinvestcontributions.Thekeychallengewillbedevelopinghighlyengagingmarketingandonlineadviceportals,andensuringthealgorithmsarerobustenoughtomeetregulatory requirements.

30


Foremployeeswhocannotaffordtoseeapensionadviser,advicecouldbeprovidedviaaworkplacepensionportalwithminimalhumanintervention.Thewebsitecouldprovidehelpwithkeydecisions,suchaswhichfundtoinvestin.Thiswouldlikelybemuchcheaperthantraditionaladvicefortwomainreasons. One,itwouldsavefinancialadvisers’timeandfees.Two,thecostsof the technology could be spread across many scheme members creatingsignificanteconomiesofscale.Forexample,WealthWizardsprovidesautomatedworkplacepensionadvicefor £100peremployeeperyear.44

Makingpensionadvicemoreaffordableandaccessiblewouldhavealargepositiveimpactonsavers.Accordingtoresearch,UKsaverswithapensionpotof£100,000saveanaverageof£98moreeverymonthandreceiveanadditionalincomeof£3,654everyyearoftheirretirementiftheytakefinancialadvice.45

GivenrelativelylowlevelsofcustomerengagementinDCpensionsaving,oursurveysuggestssurprisinglyhighwillingnesstopayforautomatedadvice:morethanathird(35percent)ofworkerswithaDCpensioninoursurveywouldpayforautomated adviceoninvestingmonthlypensioncontributionsof£80. This represents a population of at least three million people.

What are the barriers?Price sensitivity. Consumers would demand low fees. Roughly two-thirds(68percent)ofworkingDCmemberswhowouldpayforthisservicewouldnotpaymorethan£125,equivalenttoadiscountofmorethan75percentonthetypicalcostofface-to-faceadvicein this scenario.46

Small pots. Akeychallengeforprovidersisthesmallsizeofmany DC pension pots. This necessitates a low-cost solution to keepfeesaffordable.Thisneedisamplifiedbythelowlevelsofengagement and awareness typical of DC plan participants. Thekeytomakingthisviablewillbescale–highervolumescouldcompensateforlowindividualaccountfees.

Acquisition costs. Marketingcampaignstopersuadesaverstotrytheservicecouldprovecostly.Asuccessfulcampaignwouldneedtoovercomelowconsumerengagementandfinancialliteracy,especially for plans with a large number of auto-enrollees.

Despitethesebarriers,alow-costdigitalsolutioncoupledwithalargecustomerbasecanmakethisproductviableonastand-alonebasisinourview.Giventhelowcostimperative,weseealargelyautomatedallocationtooldrivenbypassives,typicallyoperatingonaworkplacewebsite.Weseethisasdigitalbydefault,withhumantouch points as complexity rises.

Figure 18. Willingness to pay for automated financial advice on £80 monthly pension contributions, DC pension members

0% 10% 20% 30% 40% 50% 60% 70% 80%

£500

£475

£450

£400

£250

£125

Less than £125

Source: YouGov 23-24 January 2017, Deloitte analysis. Sample: 134 DC pension members who would pay for automated advice on £80 monthly pension contributions.

68%

14%

7%

6%

2%

1%

2%

31


Firmswillneedtothinkaboutwhethertheserviceisregulatedand,ifso,ensuretheyhaverobustprocessestoensurecompliancewithregulatoryrequirements.Ingeneral,theregulatoryconsiderationsrelatingtoadviceonDCpensionschemesaresimilartothoseforotherretailinvestmentproductsasdescribedinSectionB.However,thereisanexemptionfromtherulesonadviserchargingwherefirmsprovideadvicetoanemployerinconnectionwithaworkplacepension scheme.47Nevertheless,anypersonalrecommendationgiventoemployeeswillbecoveredbytherules.

Implications for industry playersWebelievethatthelifeinsurersandassetmanagersthatarethemajorworkplacepensionprovidersarewellpositionedtoautomateadviceonworkplacepensions.Themainreasonisthattheyhaveunrivalledaccesstocustomers.Thisgivesthemagoodchancetoside-step the challenge of high customer acquisition costs that has hamperedpioneersofautomatedadviceinthenon-retirementinvestmentspace.Workplacepensionproviderscommunicatewithaccountholdersandcanusethesecommunicationstoofferthemautomatedadvice.Thechallengewillbetoengagethesecustomers.

“Auto-enrolmentisahugeopportunityforautomatedadvice.Arangeofplayerscouldofferan‘accountforlife’concept. Icouldseebankstyinginpensionadvicewithcurrentaccountsandofferinganaggregatedplatform.”

Deloitte interview with UK-based insurer, 2016

Providinginnovativeautomatedadviceservicescouldalsobeatoolforworkplacepensionproviderstowinbusinessfromemployers.Employers can play an important role in increasing employee engagementwiththeirpension,primarilythroughcommunicatingandreinforcingtheperceivedvalueofworkplacepensionsasthemostimportantcomponentofretirementsavingsformostconsumers.Employersmaybenefitfromsucheffortsiftheyincrease employee satisfaction.

Assetmanagerswillbenefitfromhigherflowsintoinvestmentproductsinwhichsaverswillbeadvisedtoinvest.Weregardtwodistinct categories of asset manager as well-placed to capture thisopportunity.Assetmanagersthatareownedbymajorlifeinsurance groups are well placed because they belong to the samegroupsassomeofthemajorworkplacepensionproviders.Leadingpassivefundmanagersalsoappearlikelywinnersbecausetheirfundsfitbetterwithinanultra-low-costmodel.

32


The opportunityConsumersexperiencethegreatestneedforfinancialadvicewhentheyretire.Theyhavetodecidehowtofundretirementwithsavingsaccumulatedoveralifetimeandarefacedwithtoughdecisions–suchashowmuchcashtowithdrawwhileleavingenoughinvestedtoprovideadecentincome–andcomplexproducts.Theneedforat-retirementadvicemarkedlyincreasedwhenPensionsFreedomswereintroducedin2015.Thenewrulesgiveretireesamuchwiderrangeofoptionsonhowtoconverttheirpensionpotintoretirementincomethanpreviouslywhenmanypeoplewere‘forced’intoanannuity.

Howevermanyretireesshunadvice.Currentlyaround33percentofannuitiescustomersand65percentofincomedrawdowncustomersusearegulatedadviser.48Wewouldexpecthighertake-upofadviceforthoseusingincomedrawdownthanforannuities.Incomedrawdowncanberiskierthanannuitiesinthatithasnoin-built insurance against running out of money.

Twomainbarrierspreventanddiscouragemorepeoplefromtakingadvice.Thefirstisdisengagement.Manyretireesaredisengaged with their pensions. This helps explain why only around 20percentofconsumersatretirementusePensionWiseeventhoughitoffersfreeguidance.49Second,formanyadviceistooexpensivetobeworthwhile.Thatsaid,fromApril2017consumerswillbeallowedtoaccess£500tax-freeuptothreetimesfromtheirpensionpottooffsetthecostofregulatedretirementadvice.50 Thiscouldincreasesomeconsumers’abilitytopayforadvice,butconsumerswillstilldemandgoodvalueformoney.Moreover,face-to-faceadviceoftencostsmorethan£500.

Automatedadvicecanhelplowerbothbarriers.Engagement is won in the accumulation phase long before retirement. AsdiscussedinSectionC,automatedadvicecommunicationsthataremoreproactiveandaccessiblethantoday’spaper-basedannualstatementscanbuildcustomer’sinterestandinvolvementinDCsaving.Effortsherewouldlikelygainregulatorysupport.

D. At-retirement

Key findingThereissignificantdemandforlow-costfinancialadviceintheat-retirementmarket.Duetothecomplexityofthedecisionsthatneedtobemade,themosteffectivemodelislikelytobeahybridmodelwheremostoftheprocessisautomatedbutcustomersspeaktoahumanadvisertocompletetheprocess.Thiscansavetimeandcostforadvisersandcustomersalike,allowingbothpartiestofocusonthemost complex decisions. The question is how to design a system sophisticated enoughtodealwithacomplexmarketandtounderstandthedifferentprioritiescustomersmayhavefortheirretirement.

33


TheFCAhasbeenconsideringhowfirmscanbetterengage withcustomersaspartofitssmartercommunicationsinitiative.51 Italreadyrequiresfirmstoprovideclientswithasummaryoftheiropenmarketoptionsbeforesellingthemaretirementincomeproduct,andisbehaviourallytestinghowat-retirementcommunicationsfromproviders(knownas‘wake-uppacks’)canbeclarifiedandsimplifiedtohelpconsumersexercisechoiceeffectively.52,53Itisalsoconsultingonrequiringannuityproviderstoshowconsumersthedifferencebetweentheirquoteandthehighestguaranteedquoteavailableontheopenmarket.54 This latterinitiativeshouldencouragecustomerengagementbymakingitclearhowmuchmoneycouldbeatstake.TheFCAhassuggestedthatinfutureitmaydevelopcomparisontoolsforotherretirementincomeproducts,suchasincomedrawdownproducts.55

Inadditiontomakingadvicemoreengaging,automationcanradicallyloweritscost.In-personadviceonconverting£30,000pensionsavingsintoalumpsumandaretirementincomeproduct,whichisatypicaladvicescenario,costsaround£800.56Webelieve thecombinationofawebsiteusingalgorithmsandanadviserspeakingwithcustomersoverthephone(toensureadviceissuitable)candelivergoodqualityadviceatafractionofthiscost. Ourresearchindicatesthatthetimeanadviserwouldneedtospendon automated cases would be less than half that of traditional cases.

Lowcostiskeybecausemanyconsumerswoulddemandadeepdiscountonin-personadvice.Figure19showsthat,amongthosewhowouldpayforit,almosthalf(48percent)wouldpaylessthan£205forautomatedat-retirementadvice.

Thisisanopportunityforprovidersintwoways.First,itischancetoearnnewadvice-basedrevenues.Manypeoplearewillingtopayforautomatedadviceatretirement.Second,moreimportantly,itis chance to win and retain customers at the crucial at-retirement stage.Morethan300,000peopleretireeachyearwithaDCpot.57 Forprovidersthatselldecumulationproducts,providingeasy-to-useandlow-costadviceisthewaytomarkettheseproductsandtoensurethattheyarewellmatchedtocustomers’needs.

Consumers experience the greatest need forfinancialadvicewhentheyretire.Theyhavetodecidehowtofundretirementwithsavingsaccumulatedoveralifetimeand are faced with tough decisions – such as how much cash to withdraw while leavingenoughinvestedtoprovideadecent income – and complex products.

Figure 19. Willingness to pay for automated advice on converting £30,000 pension savings into a lump sum and a retirement income product

0% 10% 20% 30% 40% 50%

£825

£780

£740

£660

£415

£205

Less than £205

Source: YouGov 23-24 January 2017, Deloitte analysis. Sample: 69 GB workers aged 30+ with pension savings worth more than £20,000 who would pay for automated advice on converting £30,000 pension savings into a lump sum and a retirement income product.

48%

23%

14%

8%

2%

5%

0%

34


What are the barriers?Akeyconcernforfirmsisregulatoryrisk.Firmsgivingregulatedadviceonpensionsarelikelytofaceahighdegreeofsupervisoryscrutinygiventhatlargesumsofmoneymaybeinvolvedandconsumerscouldrunoutofmoneyinretirementiftheyaregivenpooradvice.Manyretireeshavecomplexfinancialandpersonalcircumstancesandneedtoweighupcarefullydifferentprioritiesfortheirretirement.Somecustomersmaybevulnerabletobehaviouralbiaseswhenthinkingabouttheirretirement.Examplesincludeprojectionbias,whereconsumersmayassumetheywillbeabletoliveonthesameincomein20years’timewithoutfactoringinchangessuchasthepossibilityofgoingintoacarehome,andoverconfidencebias,whereconsumersmayoverestimatethereturnstheywillearniftheyleavetheirpensioninvestedanddrawitdownovertime.

Toensuretheygivesuitableadvice,firmswillneedtoconsiderhowbehaviouralbiasescouldaffecthowacustomeranswersquestionsandframequestionscarefullytominimisethisrisk.Giventhatbothcustomercircumstancesandretirementoptionsareoftencomplex,itisalsolikelythatfirmswillneedtosupplementtheirautomatedadvicesolutionwithahumaninteraction,sothatahumanadvisercancheckthecustomer’sunderstandingandclarifyanypointsifthefirmneedsadditionalcustomer-specificinformation.Overthelongerterm,wemayseefirmsdevelopingmorefullyautomatedadvicesolutionsthatcanmeetregulatoryrequirements,butintheshortandmediumtermahybridmodelismorelikelytobeeffective.

Formorecomplexcases,itislikelythatfirmswillneedtorefercustomerstoahumanadviserearlierintheprocess.Thisislikelyto be especially true for cases where the FCA has put in place particularlystringentrulestopreventconsumerdetriment.Forexample,wherefirmsgiveregulatedadviceonwhetheracustomershouldtransfermorethan£30,000outofcertaintypesofschemewithguaranteedbenefits,theyarerequiredtostartbyassumingthat a transfer will not be suitable and only recommend it if they can clearly demonstrate that it is suitable.58

Implications for industry playersThelargelifeinsurersandassetmanagersthataremajorworkplacepensionprovidersappearbetterplacedthanotherplayerstowincustomersbyprovidingautomatedat-retirementadvice.Fourreasonsstandout.First,theyhavethegreatestscale,andwithit,abilitytoprovidealow-costservice.Second,theycanusetheirunrivalledcustomerdatafromtheaccumulationphasetoprovidemorepersonalisedadvicethanotherplayers.Third,theycanusethesamedatatopre-populateformsmakingadvicefromthemmoreconvenientthanelsewhere.Finally,forlifeinsurers,onlytheycanprovideannuitieswhich,formanyrisk-aversecustomers,couldbeamoresuitablerecommendationfromadvicethanincomedrawdown.

Foradvisers,automationcanallowthemtospendlesstimeonthemorestraightforwardpartsoftheprocess,suchasdatacapture,andinsteadfocusonthehigh-valueareas.Forinstance,adviserscould automate product recommendation and spend more time advisingontaxconsiderationsinmorecomplexcases.

The large life insurers and asset managers thataremajorworkplacepensionprovidersappear better placed than other players to wincustomersbyprovidingautomatedat-retirementadvice.

35


E. Mortgages

Key findingMoreautomationinthemortgageadviceandapplicationprocessescouldunlocksignificantefficiencies.Borrowerswillbenefitfromwiderchoiceandpotentiallylowerfees,whilebothlendersandborrowerswillbenefitfromsmoother,fasterandmoreaccurateprocessingofapplications.Sincecustomersmaybevulnerableand/orhavecomplexfinancialcircumstances,themosteffectiveadvicemodelislikelytobeahybridwheremostoftheprocessisautomatedbutcustomersspeaktoahumanadviserattheend.

The opportunityTheannualmortgagemarketislarge,withgrosslendingvolumesof£246billionin2016.59Mortgagesfinancethelargestlifetimepurchaseandmostvaluableassetofmostindividuals.Moreover,givenvaryingindividualriskappetitesandtimehorizons,thereareseveralcomplexchoicestobemadeincluding,butnotlimitedto,fees,loanduration,interestratetype,andinterest-onlyorcapitalrepaymentoptions.Thiscombinationofahigh-valuedebtproductand the need to choose between multiple product attributes oftencreatesaneedforadvice.IntheUK,theFCArequiresfirmssellingmortgagestogiveadviceinmanycases,underrulesputinplacein2014.60 This has contributed to an increase in the proportionofconsumersreceivingadvicewhentakingoutamortgagefrom67percentin2008to97percentinH22016.61 Meanwhile,intermediatedsalesrosefrom50percentin2009/10to67percentinH22016.62Thelargesizeofthemortgageadvicemarketcreatesanopportunityforbothmortgagelendersandintermediariestoinvestinmoreautomationwhichcanreducecostsforfirmsandimprovethecustomerexperience.

Oursurveyindicatesahighlevelofreceptivitytoadigitalsolutionforthisservice–38percentofallrespondentsarewillingtopayforthisoption.Onaverage,borrowerspayaround£500toamortgagebrokerfortheirservices.63Thesefeescanbehigher,dependingonmortgagevalueandothercomplexities.Brokersarepaid0.3-0.5percentoftheloanvaluebylendersincommissions– an arrangement that is allowed under the UK regulatory regime formortgagesunlikeforinvestments.Somebrokerschoosetoreduceborrowerfees,subsidisingthisfromlendercommissions.Oursurveyresultssuggestthatwhilepotentialusersarepricesensitive,asmanyas47percentofrespondentswillingtopayforanautomatedsolutionwouldpay£125ormoreforthisservice.Whatmakesthispropositionexcitingisthatwebelieveadigitalofferingispotentiallyviableonlenderfeesalone,astheservicecanbeprovidedmorecheaplythanaface-to-faceoffering.

Theannualmortgagemarketislarge,withgrosslendingvolumesof£246billionin2016.Mortgagesfinancethelargestlifetimepurchaseandmostvaluableassetofmostindividuals.

36


Webelievethatthishighwillingnesstoadoptadigitalsolutiondespitetheinfancyofthisoffer(withonlyafewstart-upproviders)suggestssignificantinefficienciesinthemortgageapplicationandapprovalsprocesses.

Whilebrokersscanthefullsetofproductsavailableandrelevanttocustomerneedsdependingontheirlevelofserviceoraccesstothemarket,inpractice,theycanonlybefamiliarwiththedetailsoftheunderwritingpracticesofalimitednumberoflenders,knowledgeofwhichiskeytodeliveringaproductsuccessfullytoaborrower.Incontrast,adigitaltoolshouldbecapableofscanningfor products much more widely and automatically assessing the customeragainstthelendingcriteria,benefitingconsumersandpotentiallyloweringrejectionrates.Nevertheless,inpractice,anautomatedsystemislikelytoneedtobesupplementedwithsomeinvolvementfromahuman,particularlyinassessingsuitabilityandcheckingthatthecustomerunderstandstheproduct.

Butequallyasexciting,webelieve,isthepotentialtoincreaseefficiencythroughoutthemortgageapplicationandapprovalprocess,yieldingsizeablesavingsforborrowersandlendersalike.

Mortgagesaredocumentation-heavy–thisrelationshipisdeeplyintermediated,andmanyconsumershaveadifferentmortgageprovidertotheircurrentaccountprovider.Asaresult,borrowersoften face repeated requests for documentation as part of their applications,whichoftenneedstobeverifiedand/orcertified,witha lot of time lost in the processing of this information.

Webelievethatmoreautomationintheadviceandapplicationprocessescouldbenefitborrowersandlendersintwoways:byincreasingefficiencyandbyspeedinguptheprocess.Bydigitallyacceptingandprocessingdocuments,digitalintermediariescanaddsignificantconveniencetocustomers.Iffirmscandeviseaprocesswherebythesedigitalformatsareacceptabletolenders,they can both speed up processing substantially as well as ease pressure points for lenders.

Ultimately,thewiderchoiceadigitalbrokercanofferaborrowerandtheefficiencygainsforlendersandborrowersalikeare hugebenefits.

Oursurveyindicatesahighlevelofreceptivitytoadigitalsolutionforthisservice–38percentofallrespondentsare willing to pay for this option.

Figure 20. Willingness to pay for automated advice to find a mortgage

0% 10% 20% 30% 40% 50% 60%

£500

£475

£450

£400

£250

£125

Less than £125

Source: YouGov 23-24 January 2017, Deloitte analysis. Sample: 378 GB adults aged under 50 who would pay for automated advice to find a mortgage.

42%

28%

16%

6%

3%

4%

2%

37


What are the barriers? Anydigitalintermediarywillfaceveryhighcustomeracquisitioncosts.Consumerawarenessofalternativesisverylowandgiventhehighvalueofthisproducttotheborrower,buildingtrustwilltakebothtimeandmoney.

Adigitalintermediarywillneedtobuilddeepknowledgeoftheunderwritingrequirementsacrosslenders.Integratinganydigitaldocument processing capabilities with lender systems is another challenge. The system will also need to be sophisticated enough to considercompetingobjectivesthatthecustomermayhave,suchas price and speed.

Formostpeople,takingoutamortgageisaverymaterialfinancialdecisionandanunsuitablemortgagecouldresultinsignificanthardship,includingpotentialevictionfromtheirhome.Inthiscontext,firmsprovidingadviceonmortgagescanexpectahighdegreeofscrutinyfromtheFCA.TheFCAissupportiveofinnovationintheadvicemarketandiscurrentlyconsideringpotentialregulatorybarrierstofirmsprovidingautomatedadviceformortgagesaspartofitsmortgagesmarketstudy.

However,anyautomatedsolutionwillneedtomeettheFCA’sstrictconsumerprotectionrequirementsformortgageadvice,includingsuitability assessments.64

Inpractice,someregulatoryrequirementsarelikelytoposemorechallengesforanautomatedsolutionthanforahumanadviser.Forexample,anadviserneedstoensurethatthecustomerunderstandstheimplicationsoftakingonasignificantamountofdebt in the face of uncertainties about future interest rates and thecustomer’sfutureincomeandexpenditure.Advisersalsoneedtobeabletoidentifywherecustomersmaybevulnerableormaybeoverlyoptimisticabouttheirabilitytomakerepayments.Humanadvisersmayfindthiseasierastheyaremoreabletoreadbodylanguage,askprobingquestionswhicharespecifictotheinformationprovidedbythecustomer,andgatherbackgroundinformationthroughtalkinginformallytothecustomer.CustomervulnerabilityisakeyfocusfortheFCAacrossallfinancialservicesmarkets,butisespeciallyrelevanttomortgagesastheyarelong-term debt products.65

“Inverycomplexcases,apurelyautomatedservicewouldbedifficult – for example if someone wants to purchase buy-to-let mortgages simultaneously.”

Deloitte interview with UK-based start-up, 2016

Asaresultofthesechallenges,itislikelythatfirmswillneedtosupplementtheirautomatedadvicesolutionwithahumanadviserwhocancheckthecustomer’sunderstandingandclarifyanypointsifthefirmneedsadditionalcustomer-specificinformation.Existingonlinemortgageadvisersrequireallcustomerstospeaktoahumanbyphoneorwebchataspartoftheprocess.Overthelonger-termwemayseefirmsdevelopingmorefullyautomatedadvicesolutionsthatcanmeetregulatoryrequirements,butintheshortandmediumtermahybridmodelismorelikelytobeeffective.

Implications for industry playersTraditionalmortgagebrokerswillbehardesthit.Overtime,feelevelsarelikelytodecline.Webelievethatborrowerfeescouldeventuallydisappear,withintermediariesfundedthroughlenderfees.Withoutaresettotheiroperatingmodel,oramodelthatsignificantlyenhancestheroleofdigitalcapabilities,theyarelikelytoseebothdiminishingshareanddiminishingprofits.

Lenders will see greater product transparency and may face heightenedcompetition.However,thisshouldbeoffsetbysignificantefficiencygainsfromdigitalsolutions.Inaddition,withaccesstotherighttechnology,bankscouldexploittheiradvantagedaccesstocustomerdata(e.g.oncurrentaccounts)anddisintermediatebrokersbydirectlytargetingpotentialmortgagecustomerswithtailoredoffers.Theycouldevensetuptheirownonlinemortgagebrokersthatcouldactasanadditionaldistribution channel.

Webelieveonlineadvisersarewellplaced.However,theyneedtoovercomeseveralchallengesincludinghighcustomeracquisitioncosts,buildingknowledgeoflenderunderwritingcriteriaandmeeting regulatory requirements.

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The opportunityIntheUKthereisalargemarketforindividualprotection.Thistype of product insures policyholders and their dependants from theadversefinancialconsequencesofdeath,illnessordisability.Themainproductlinesaretermassurance,criticalillness,wholelifeandincomeprotection.Weestimatetheprotectionprofitpoolis around £1 billion annually.66

Howeverthereisastubborn‘protectiongap’.Manyconsumersare reluctant to buy enough protection to match their needs. SwissReestimatesthisgapbetweenthelevelofcoverinplaceandthatrequiredtomaintainthelivingstandardsofdependantsis more than £2 trillion for the UK adult population.67

Thekeybarrierstowiderconsumertake-uparealackofperceivedneedand,connectedtothis,perceivedhighcost.Onlyafifth(22percent)ofadultsconsiderlifeinsuranceas‘necessary’andonlytenpercentconsiderit‘affordable’.68 This is despite half (49percent)oftermassurancepolicyholderspayinglessthan£20permonth.69

IntheUKthereisalargemarketforindividualprotection.Thistypeofproduct insures policyholders and their dependantsfromtheadversefinancialconsequencesofdeath,illnessordisability.

Twoissueshaveloweredsales.First,consumersincorrectlyassociate protection with payment protection insurance (PPI).Thisweigheddowndemandfromthelate2000sduetoaccusationsofPPImis-selling.Second,inrecentyearsbanksandbuildingsocietieshavebeenscalingbacktheiradvisoryservicesformassmarketcustomers.Thishasledtofewerbankadvisers,andinturn,fewerrecommendationsofprotection.

Webelievethatautomatedadvicecanaddresstwokeychallengesintheprotectionmarket:thelackofperceivedneedforcoverattherootofthe‘protectiongap’,andtheexpenseattachedtotheadviceprocessthathasledsomeadviserstoretreat.

Responding to life events.Automatedadvicecandemonstratetheneedforprotectioninaproactivewaythatcouldhelpclosethe‘protectiongap’.Morethanhalf(52percent)ofadultsareexpectingachangeintheirpersonalcircumstancesoverthenext12 months.70Theseeventswilltriggerachangeintheneedforprotection.Forinstance,24percentareexpectingtochangejobsandthesemoveswilltriggerachangeintheneedforreplacementincomeintheeventoflong-termillness.71 These people could be targeted with timely communications explaining why they need protection,howtheirneedischangingandwhattodoaboutitwithalinktoanautomatedadviceportal.Wewouldenvisagethisasbeingprovidedbylifeinsurersinpartnershipwithanotherorganisationwithaccesstoawiderpoolofcustomers,suchasabankorretailer.

F.Individualprotection

Key findingAutomatedadvicecanplayakeyroleinmakingtheproductmorerelevantinthedigitalage.In-the-momentadviceandproactivemarketingcanbetterdemonstratethe clear need for protection to customers. A smooth purchasing experience canmakeiteasierforthemtobuyit.Thehurdleswillbeobtainingthenecessarycustomerdataandwinningcustomers’trust.

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Automated sales process.Automatedadvicetoolscanhelpencouragemoreadviserstorecommendprotectionbygivingthemaquicker,light-touchsaleschannel.Twoopportunitiesstandout.First,inthemarketforprotectiontocoveramortgage,application forms could be pre-populated using data captured fromthemortgageapplicationprocess.Thiswouldsavevaluableadvisertimeonthephoneaskingcustomersforbasicinformation.Second,customerscouldbeguidedthroughtherelativelysimplestepsintheadviceprocessonawebsitebeforespeakingwithanadvisertocompletetheprocess,theso-calledhybridmodel.Thiswouldsavecostandallowadviserstofocustheir time on the hardest parts of the process such as choosing a product.Thisrepresentsachanceforadviserstoreducethecostofadviceand,potentially,increaseitsquality.

Oursurveysuggestsautomatedprotectionadvicecouldbeadoptedbymanypeople.Overall,almosthalf(45percent)ofadultswithchildrenaged18andunderwouldpayforautomatedadvicetofindlifeinsurance.Thesepeoplenumberaboutfivemillion.

Almosthalf(45percent)ofadultswithchildrenaged18andunderwouldpayforautomatedadvicetofindlifeinsurance.

What are the barriers?Themainchallengeforanadvicepropositionthattargetscustomersastheirneedsforprotectionchangewouldbewinningcustomers’trust. There are examples from the retail industry where customers objecttopreciselytargetedmarketingbecauseitfeelssomewhatinvasive.Nonetheless,wefeelthatthisbarrierissurmountable.Manymorepeoplerecognisethebenefitofhavinglifeinsurancethanhaveit.Forexample,70percentofparentswithchildrenunder18intheirhouseholdagreelifeinsuranceisworthhavingattherightpricebutonly45percentholdapolicy.72Tous,thissuggeststhatcustomerinertiaisaproblem,i.e.somecustomersareputoffbuyinglifeinsuranceandnevergetroundtoit.Someofthesepeoplewouldlikelybenefitfromanudgetotakeaction.

Connectedtothechallengeofwinningcustomers’trustistheissueofhowtocollect,store,manageandusecustomerdatasecurely,andfirmsneedtoensurethattheyfullytakeintoaccount current and future data protection regulations as theydesigntheirsolutions.ThenewGeneralDataProtectionRegulation(GDPR),whichwillapplytobothregulatedadviceandguidanceandentersintoforcein2018,willmandateorganisationalaccountability,andwillrequirefirmstoimplementrobustprivacygovernanceandingeneraltakeamoreproactiveapproachtoprivacycompliance.73TheGDPRintroducesanewmaximum monetary penalty of 4 per cent of annual global turnoverthatcanbeimposedincasesofseriousnon-compliance.

Figure 21. Willingness to pay for automated financial advice to find life insurance

0% 10% 20% 30% 40% 50%

£150

£140

£130

£120

£75

£40

Less than £40

Source: YouGov 23-24 January 2017, Deloitte analysis. Sample: 208 GB adults with children aged under 18 who would pay for automated advice to find life insurance.

48%

20%

16%

6%

5%

1%

4%

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Whereafirmtargetsitsmarketingcommunicationsbasedonthecustomer’scircumstances,thisdoesnotautomaticallymeanthefirmisprovidingregulatedadvice.However,ifthefirmhighlightstothecustomerthepersonalcircumstanceswhichhaveledtothembeingcontactedandsuggestsspecificproductswhicharerelevantforthem,thisislikelytobeconsideredbytheFCAtobean implicit personal recommendation.74Firmsprovidingpersonalrecommendationsaresubjecttosuitabilityrequirementsandareliabletopayredressandpotentiallyregulatoryfinesiftheyhavenottakenreasonablestepstoensurethesuitabilityoftheiradvice.Therefore,theyneedtoensurethattheycollectallrelevantinformationaboutacustomer’scircumstancesandcandemonstrate suitability.75Inmostcases,thecustomerinformationalreadyheldbythefirmisunlikelytobesufficientforthis.Providerscoulddirectcustomerstoawebsitewheretheyareaskedmorequestionsabouttheircircumstances,althoughthisprocessmaydeter some customers from completing the purchase.

Implications for industry playersLife insurers which distribute their products through partnershipswithbanksandbuildingsocietiesarebestplacedtoofferproactiveautomatedadvice.Thisisbecausebanksandbuildingsocietieshaveaccesstoawidepoolofcustomers,includingthosewhoareuninsured.Theyalsohavedatathatwouldprovideaninsightintothelifeeventsthatchangetheneedforprotection.Wenotethatthelargestprotectionproviderssellthroughthebankchannel.Proactiveautomatedadvicewould,therefore,favourthelargeincumbents.

Adviserswouldbewinnersfromamovetoautomatetheinitialstepsintheadviceprocess.Thiswouldreducetheamountoftime spent on each case and lower costs. As in the mortgage brokingmarket,start-upsmayleadthewayindevelopinghybrid(humanplusdigital)adviceinterfaces.Thekeytosuccessisan easy-to-use interface with a seamless experience when a customermovesfromusingthewebsitetospeakingwithanadviser.Start-upshaveatrackrecordofinnovationbuiltonsmooth customer experience.

Webelievethatautomatedadvicecanaddresstwokeychallengesintheprotectionmarket:thelackofperceivedneedforcoverattherootofthe‘protectiongap’,andtheexpenseattachedtotheadviceprocessthathasledsomeadviserstoretreat.

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Nextsteps–keyquestionstoconsider

Customer analysis • Whichcustomersegmentsshouldyoutarget? • Whatmethodsofin-persontesting(e.g.focus groups)areappropriateforyoutounderstand customerengagement,behaviouralbiasesandpotentialadoptionofnewtechnology?

• Howcanyoudesigndifferentiated,engagingcustomerpropositions,includingacrossabroadrangeofcustomerneeds?

• Whatpotentialchannelconflictswillariseandwhatdistributionmodelsareappropriate?

Regulation • Aretheservicesyouwanttoprovideregulated orunregulated?Ifitisunclear,haveyouengaged withtheFCAtodiscuss?

• Ifregulated,howwillyoucomplywiththerelevantrequirements(e.g.suitability)?Doyouneedahybridsystem(involvingahuman)formorecomplexcases?

• Areyourriskandcontrolframeworksfitforpurposetomanagenewandemergingriskspresentedbyautomatedadvice(e.g.designandoversightofalgorithmsandmachine learning/AIapplications)?

Business model • Where is it feasible for you to maximise profitinthevaluechaine.g.advice,products?

• Howdoyouacquirecustomersprofitably? • Howmuchtocharge(ifanything),andhowshouldyoustructurecharges,e.g.fixedorasapercentageofassets?Considerregulatoryrestrictionsifyouwanttoprovideregulatedadviceoninvestmentproductsforfreeorbelowcost.

• Howcanyouscaleupyourpropositions? • Shouldyougiveadviceonlyonyourownproductsoronthewidermarket?

Technology • HowcanyoumakeuseofAIandmachinelearning, andforwhat?

• Willyoubuildorbuytechnologyinfrastructure? • Howcanyouensurecyberresilienceanddatasecurity? • CanyoueasilyintegratetheautomatedadviceplatformintoexistingITinfrastructure?

• Howdoyouensurelinkagesandconsistencywithotheradvicechannels(e.g.humanorhybridapproaches)?

• Howmuchdoyouwanttoinnovatevs.follow,andwhatdoesthismeanforyourtechnologychoices?

M&A • Inwhichareascanstart-upsand/orthoughtleaderscomplementyouroffering(e.g.technology)?

• How will you structure potential partner relationships: acquisitions,jointventures,strategicstakes?

Talent • What organisational cultural changes are needed toimplementautomatedadvice,e.g.customervs productcentricity,agility?

• Doyouhaveanygapsinrequiredskillsets,e.g.financialadvice,technology,marketing,behaviouraleconomics,riskandcompliance?

• Doyouneedtolooktonon-traditionaltalentpoolsto acquirethese?

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Conclusion

Initialiterationsofautomatedadvicehavecentredonlowcostwealthmanagement.However,webelievethatitskeycharacteristicsofaffordabilityandconveniencewillbeattractivetoawiderangeofconsumersacrossseveraldifferenttypesoffinancialservices.Wefoundevidencefromourconsumersurveyofsignificant,ifprice-sensitive,latentconsumerdemand.Thecostefficiencyofautomatedadvice,itsobjectivityandabilitytomaintainaclearaudittrailarekeypositiveattributesforproviders.Webelievethatincreasedautomationintheprovisionofadviceonretirementproductsandmortgagesisimminent,withahybridmodelinvolvingsomehumaninteractionlikelytodominateinthesemarketsintheshorttomediumterm.

“In5-10yearswewillprobablynotusetheterm‘roboadvice’–digitalwilljustbeanotherchannel.Theprovisionofadvicewillbe‘omni-channel’,althoughwill be underpinned by a consistent underlyingengine.”

Deloitte interview with UK-based insurer, 2016

Firmsprovidingautomatedadvicewillhavetonavigatelowfinancialliteracyandengagement,lowfees,theriskofcustomersswitchingfromhighertolowermarginproducts,aswellasregulatoryriskanduncertainty.However,asexplainedinthispaper,someofthesechallengescanbeovercomethroughinnovativesolutionstomakeiteasierforconsumerstoengagewiththeirfinances,costefficienciesdrivenbyeconomiesofscaleandtailoringservicestoparticularconsumersegments.Fromaregulatoryperspective,firmsmustinvesttoestablishgovernanceandcompliancecontrolsthatarefittodealwiththedifferenttypeandscaleofrisksintroducedbyautomatedadvice.TheFCAplanstopublishadditionalguidancewhichwilllikelyhelpreduceregulatoryuncertaintyinrelationtosomeservices.

Incumbentsarewellplacedbothtoshapeanddrivethepaceofadoptioninmostadvicesituationsastheyhaveaccesstoalargepoolofexistingclients.Iftheydonotlead,otherswill.Thismeansincumbentsmayriskbecomingbystandersastheindustryrapidlyadoptsnewproductsandroutes-to-market,ashashappenedinmanyotherindustries,rangingfromretailtotelecoms.

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Endnotes

1. YouGovplcconductedanonlinesurveyof2,046GBadultson23-24January2017forDeloitte.ThefigureshavebeenweightedandarerepresentativeofallGBadults(aged18+).

2. TheFinancialAdviceMarketReviewdefinedtheadvicegapasasituationinwhichconsumersareunabletogetadviceandguidanceonaneedtheyhaveatapricetheyarewillingtopay.ResponsestotheCallforInputindicatedstronglythatthereisanadvicegap,andthatthisisparticularlysignificantinrelationtopensionsandsavingsand,toalesserextent,protection.The Financial Advice Market Review Final Report,HMTandFCA,March2016https://www.fca.org.uk/publication/corporate/famr-final-report.pdfSeealsoBridging the advice gap Delivering investment products in a post-RDR world,Deloitte,2012 https://www2.deloitte.com/content/dam/Deloitte/uk/Documents/financial-services/deloitte-uk-fs-rdr-bridging-the-advice-gap.pdf

3. Forexplanationsoftheseterms,pleaseseeFigure3.4. Forexample,theFCAdescribesautomatedadviceas‘fullyorpartiallyautomatedonlineservicesandothermodelsthatusetechnologytodeliverlowercostadvice’.In

contrast,descriptionsbyBundesanstaltfür.Finanzdienstleistungsaufsicht(BaFin),theAustralianSecuritiesandInvestmentsCommission(ASIC)andtheUSDepartmentofLaborexcludepartially-automatedmodels,talkingaboutadvicewithoutanyinteractionwithahumanadviser.Theexactservicesdescribedcanalsodiffer.Forexample,whilesomeregulatorstalkonlyaboutadvice,theFCA’sdescriptionalsoincludesdiscretionaryinvestmentmanagementandBaFin’sdescriptionalsoincludesautomated‘socialtrading’(wheretheinvestmentstrategyofasuccessfultraderisautomaticallyreplicatedinthecustomer’sinvestmentportfolio).Descriptionsbyinternationalregulatorybodies,suchastheInternationalOrganizationofSecuritiesCommissions(IOSCO)andtheEuropeanSupervisoryAuthorities(ESAs),arebroad,coveringarangeoffully-orpartially-automatedservices.Advice Unit,FCA,June2016,https://www.fca.org.uk/firms/project-innovate-and-innovation-hub/advice-unit FinTechs: Young IT companies on the financial market,BaFin,January2016https://www.bafin.de/SharedDocs/Veroeffentlichungen/EN/Fachartikel/2016/fa_bj_1601_fintechs_en.html Regulatory Guide 255, Providing digital financial product advice to retail clients,ASIC,August2016,http://download.asic.gov.au/media/3994496/rg255-published-30-august-2016.pdf. BestInterestContractExemption,Federal Register Volume 81, Number 68,April2016,http://webapps.dol.gov/FederalRegister/HtmlDisplay.aspx?DocId=28807&AgencyId=8&DocumentType=2 Joint Committee Discussion Paper on automation in financial advice,EuropeanSupervisoryAuthorities,December2015,https://www.eba.europa.eu/documents/10180/1299866/JC+2015+080+Discussion+Paper+on+automation+in+financial+advice.pdf Report on the IOSCO Social Media and Automation of Advice Tools Surveys,IOSCO,July2014,https://www.iosco.org/library/pubdocs/pdf/IOSCOPD445.pdf

5. In2015,theUKgovernmentchangedthelawtogiveretireesamuchwiderrangeofoptionsonhowtoconverttheirpensionpotintoretirementincomethanpreviously,whenmanypeoplewere‘forced’intoanannuity.

6. Intheconsumersurvey,weaskedaboutconsumers’willingnesstouseandpayforadviceusingabroaddefinitionof‘advice’whichwouldincludeunregulatedguidance.Thisisbecauseconsumersarenotreadilyabletodistinguishbetweenregulatedandunregulatedadvice.

7. Peeraveragesarebasedonthefollowinggroups: •Netwealthexcludingpensionsandproperties–AllGBadults(Sample:2,046) •Netpropertywealth–AllGBadults(Sample:2,046) •Pensionholdings–AllGBadults(Sample:2,046) •Valueofpensions–AllGBadultswithapension(Sample:922) •Willingnesstopayforautomatedadviceoninvesting£11,000–AllGBadultswithmorethan£5,000insavings&investments(excludingpensionsandpropertywealth)(Sample:842) •Willingnesstopayforautomatedadviceonconverting£30,000pensionsavingsintoalumpsumandretirementincome–AllGBworkersaged30+with pensionsavingsworthmorethan£20,000(Sample:173) •Willingnesstopayforautomatedadviceonconverting£30,000pensionsavingsintoalumpsumandretirementincomeamongconsumersaged45+–AllGBworkersaged45+withpensionsavingsworthmorethan£20,000(Sample:117) •Willingnesstopayforautomatedadviceoninvesting£80monthlypensioncontributions–AllGBworkerswithaDCpension(Sample:921) •Willingnesstopayforautomatedadviceonfindingamortgage–AllGBadultsagedunder50(Sample:1,100)

8. HMTintendstoamendtheregulatorydefinitionofadviceforregulatedfirmsgivingadviceoninvestments,DCpensionschemesandinsurancetobringitintolinewiththeMiFIDIIdefinition,whichwillrestrictittocaseswhereapersonalrecommendationismade.By‘regulatedfirms’,HMTmeansauthorisedfirmsexceptthosethatholdonlyoneorbothofthefollowingpermissions:‘advisingoninvestments’or‘agreeingtoadviseoninvestments’.Thischartshowswheretheadviceboundarywilllieforregulatedfirmsafterthischangehasbeenmade.NotethatHMThasnotstatedanyintentiontochangethedefinitionofadviceformortgages.

9. Financial Advice Market Review Final report,March2016,HMTandFCA,https://www.fca.org.uk/publication/corporate/famr-final-report.pdf10. AdviceUnit,FCA,2016,https://www.fca.org.uk/firms/project-innovate-and-innovation-hub/advice-unit11. InApril2017theFCApublishedaconsultationsettingoutproposedguidancetosupportfirmsoffering‘streamlinedadvice’onalimitedrangeofconsumerneeds.In

summer2017theFCAwillpublishanotherconsultationonproposedrevisedguidanceontheamendedadviceperimeterandnon-advisedservices.Insummer2017,theFCAalsoexpectstosetoutfurtherguidanceinformedbytheAdviceUnit’sworkwithfirms.FormoreinformationseeGC17/4,FCA,April2017,https://www.fca.org.uk/publication/guidance-consultation/gc17-04.pdf

12. Streamlinedadviceisacollectivetermusedtodescribeadvisoryservices(suchassimplifiedandfocusedadvice)thatprovideapersonalrecommendationthatislimitedtooneormoreofacustomer’sspecificneeds.Theservicedoesnotinvolveanalysisofthecustomer’scircumstancesthatarenotdirectlyrelevanttothoseneeds.

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13. Amending the definition of financial advice: consultation response,HMT,March2017,https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/594790/pu2041_amending_definiton_financial_advice_response_2017_FINAL.pdf. By‘regulatedfirms’,HMTmeansauthorisedfirmsexceptthosethatholdonlyoneorbothofthefollowingpermissions:‘advisingoninvestments’or‘agreeingtoadviseoninvestments’.UKfirmscurrentlyfacetwodefinitionsoffinancialadvice:oneisdefinedinMiFID,andanotherintheRegulatedActivitiesOrder(RAO).Thelatterpre-datestheMiFIDdefinitionandiswiderinscope.Theregulatedactivityof‘advisingoninvestments’underArticle53oftheRAOiswiderinscopethan‘investmentadvice’underMiFID.ThisisbecauseMiFIDrequiresadvicetobeofapersonalnaturewhereastheRAOdoesnot.ForadvicetoberegulatedunderArticle53oftheRAO,itmust: •relatetoarelevantinvestment,whichincludescontractsofinsurance •begiventoapersonintheircapacityasaninvestororpotentialinvestor(orintheircapacityasagentforaninvestororpotentialinvestor) •relatetothemeritsofthembuying,selling,subscribingfororunderwritingtheinvestment(orexercisingrightstobuy,sell,subscribefororunderwritesuchan investment) MiFIDinvestmentadviceinvolvestheprovisionofpersonalrecommendationstoacustomer,eitheruponthecustomer’srequestoronthefirm’sinitiative.Itcomprises three main elements: •theremustbearecommendationthatismadetoapersonintheircapacityasaninvestororpotentialinvestor(orintheircapacityasanagentforaninvestoror personalinvestor) •therecommendationmustbepresentedassuitableforthepersontowhomitismadeorbasedontheinvestor’scircumstances •therecommendationmustrelatetotakingcertainstepsinrespectofaparticularinvestmentwhichisaMiFIDfinancialinstrument,namelytobuy,sell,subscribe for,exchange,redeem,holdorunderwriteaparticularfinancialinstrument(orexercisearighttobuy,sell,subscribefor,exchange,orredeemafinancial instrument)FAMRrecommendedamendingthedefinitionofadviceintheRAOtobringitinlinewithMiFIDtohelpremoveuncertainty.

14. Online investment and advice services – the consumer experience,ConsumerPanel,December2016,https://www.fs-cp.org.uk/sites/default/files/final_panel_position_paper_online_investment_and_advice_services.pdf

15. Online investment and advice services – the consumer experience,ConsumerPanel,December2016,https://www.fs-cp.org.uk/sites/default/files/final_panel_position_paper_online_investment_and_advice_services.pdfandFG15/1 Retail investment advice: clarifying the boundaries and exploring the barriers to market development, FCA,January2015,https://www.fca.org.uk/publication/finalised-guidance/fg15-01.pdf

16. FG15/1 Retail investment advice: clarifying the boundaries and exploring the barriers to market development,FCA,January2015,https://www.fca.org.uk/publication/finalised-guidance/fg15-01.pdf https://www.fca.org.uk/publication/finalised-guidance/fg15-01.pdf

17. Compiled from our discussions with clients and from Feedback Statement on Smarter Consumer Communications,FCA,October2016,https://www.fca.org.uk/publications/discussion-papers/smarter-consumer-communications-further-step-journey

18. FidelityLabsCityVisualisation,http://new.fidelitylabs.com/city/19. Feedback Statement on Smarter Consumer Communications,FCA,October2016,https://www.fca.org.uk/publications/discussion-papers/smarter-consumer-

communications-further-step-journey20. Report on digital investment advice,FinancialIndustryRegulationAuthority(FINRA),March2016,https://www.finra.org/sites/default/files/digital-investment-advice-

report.pdf21. Regulatory guide 155 – Providing digital financial product advice to retail clients,ASIC,August2016,http://download.asic.gov.au/media/3994496/rg255-published-30-

august-2016.pdf22. The Promise of FinTech – Something New Under the Sun?MarkCarney,BankofEngland,January2017,http://www.bankofengland.co.uk/publications/Pages/

speeches/2017/956.aspx.Iftheuseofautomatedplatformsbecamewidespread,andtheunderpinningalgorithmsusedverysimilarlogic,theremaybeariskthatasignificantnumberofcustomersmayenduptransactinginthesamewaysinrelationtocertainfinancialproducts.TheESAsJointCommitteehasalsohighlightedthis‘herdingrisk’and,likeMrCarney,believesitcouldleadtoincreasedvolatilityinthemarketorincreasepro-cyclicality,whichinturnwouldresultincustomerdetrimentintheeventofamarket‘shock’event.

23. Regulating cyber-resilience,Deloitte,December2016http://blogs.deloitte.co.uk/financialservices/2016/12/regulating-cyber-resilience.html24. Spixii,https://spixii.ai/25. “Alexa, what’s an annuity?” Insurance company Aviva is using Amazon Echo,CityAM,January2017,http://www.cityam.com/256375/alexa-whats-annuity-insurance-

company-aviva-using-amazon26. Achatbotisacomputerprogramdesignedtosimulateconversationwithhumanusers,especiallyovertheinternet.27. Cost of Advice Guide,Unbiased,https://www.unbiased.co.uk/cost-of-financial-advice28. SeeSection1formoredetailontheregulatorydefinitionofadvice.29. BritishBankers’AssociationHighStreetBanking,December2016,https://www.bba.org.uk/news/statistics/high-street-banking/30. HerMajesty’sRevenueandCustomsIndividualSavingsAccountStatistics,August2016,https://www.gov.uk/government/uploads/system/uploads/attachment_data/

file/547217/Full_Statistics_Release_August_2016.pdf31. Private client wealth managers shun moderately rich,FinancialTimes,June2015https://www.ft.com/content/a5c19f24-15c4-11e5-be54-00144feabdc032. See for example Cost of Advice Guide,Unbiased,https://www.unbiased.co.uk/cost-of-financial-advice33. DeloitteanalysisbasedonFormADVdated31January2017forBettermenthttps://www.adviserinfo.sec.gov/IAPD/content/ViewForm/crd_iapd_stream_pdf.

aspx?ORG_PK=149117andFormADVdated2August2016forPersonalCapitalhttps://www.adviserinfo.sec.gov/IAPD/content/ViewForm/crd_iapd_stream_pdf.aspx?ORG_PK=155172

34. Charges and interest rates,HargreavesLansdown,http://www.hl.co.uk/investment-services/fund-and-share-account/charges-and-interest-rates35. SeeCOBS6.1AintheFCAHandbook,https://www.handbook.fca.org.uk/handbook/COBS/6/1A.html36. TheFCAhasproposedguidanceonadviserchargesforverticallyintegratedfirms(VIFs)inrelationtotheinterpretationof‘longterm’andtheflexibilityallowedinthe

cross-subsidisationrules.FormoreinformationseeQuarterlyConsultationNo15,FCA,December2016,https://www.fca.org.uk/publication/consultation/cp16-39.pdf

37. TheDeloitteUKInsightteamdevelopedamodeltoestimatetheprofitabilityofstand-aloneroboadvisersatdifferentlevelsofAuMunderthreefeescenarios.Thisincludedassumptionsonadministration,compensationandmarketingcosts.Theunderlyingdatawasobtainedfrompubliclyavailablesourcesincludingthereportsand disclosures made by a range of UK and US asset and wealth managers as well as our own proprietary data sources.

38. DeloitteanalysisbasedonproviderSecuritiesandExchangeCommissionfilings

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39. TheDeloitteUKInsuranceInsightteamdevelopedamodeltoestimateUKlifeinsuranceprofitsbyproduct2015-25.Profitswerederivedfromestimatedassetsandprofitmarginscombinedwithgrowthassumptions.Theunderlyingdatawasobtainedfrompublicandprivatesourcesincludingannualreports,regulatoryreturnsandanalystreports.FormoreinformationseeUKlifeinsurancefutures,Deloitte,January2016,https://www2.deloitte.com/uk/en/pages/financial-services/articles/uk-life-insurance-futures.html

40. UK life insurance futures,Deloitte,January2016,https://www2.deloitte.com/uk/en/pages/financial-services/articles/uk-life-insurance-futures.html41. Workplace Pensions, UK, June 2016,Mintel,June201642. Pensions Dashboard prototype to be ready by spring 2017,HMT,September2016,https://www.gov.uk/government/news/pensions-dashboard-prototype-to-be-ready-

by-spring-201743. DC trust: a presentation of scheme return data 2013 – 2014,ThePensionsRegulator,http://www.thepensionsregulator.gov.uk/doc-library/dc-trust-a-presentation-of-

scheme-return-data-2014.aspx44. Receiving pension savings advice for £100 a year,WealthWizards,https://www.wealthwizards.com/blog/receiving-pension-savings-advice-for-100-a-year/45. The facts and figures behind the value of advice,Unbiased,https://www.unbiased.co.uk/value-of-advice/report-stats46. Cost of Advice Guide, Unbiased,https://www.unbiased.co.uk/cost-of-financial-advice47. SeeCOBS6.1A.1RintheFCAHandbook,https://www.handbook.fca.org.uk/handbook/COBS/6/1A.html48. Data Bulletin Issue 8,FCA,February2017,https://www.fca.org.uk/publication/data/data-bulletin-issue-8.pdf.ThedatacoverstheperiodApriltoSeptember2016.By

‘drawdown’wemeananarrangementwherebythecustomercanwithdrawmoneyfromtheirpensionpotovertimetocreateanincome.49. TheFCAfoundthatinQ3201520%ofconsumerstoldtheirproviderstheyhadusedPensionWise.Providersareonlyrequiredtorecordwhetheraconsumersaid

theyusedPensionWisewhenconsumersarenotusingaregulatedadviser.Data Bulletin Supplement Retirement income market data,FCA,April2016,https://www.fca.org.uk/publication/data/data%20bulletin%20suppl%20apr%2016.pdf

50. Introducing a Pensions Advice Allowance: response to the consultation,HMT,February2017,https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/589163/Pensions_Advice_Allowance_response_to_the_consultation_web.pdf

51. FS16/10 Smarter Consumer Communications,FCA,October2016,https://www.fca.org.uk/publication/feedback/fs16-10.pdf52. SeeCOBS19.4intheFCAHandbook,https://www.handbook.fca.org.uk/handbook/COBS/19/4.html.53. Update on our work around pensions and retirement income,FCA,July2016,https://www.fca.org.uk/publications/market-studies/update-our-work-around-pensions-

and-retirement-income54. CP16/37 Implementing information prompts in the annuity market,FCA,November2016,https://www.fca.org.uk/publication/consultation/cp16-37.pdf55. Update on our work around pensions and retirement income,FCA,July2016,https://www.fca.org.uk/publications/market-studies/update-our-work-around-pensions-

and-retirement-income56. CostofAdviceGuide,Unbiased,https://www.unbiased.co.uk/cost-of-financial-advice57. Pension freedom for 400,000 hardworking people from today,HMT,March2014,https://www.gov.uk/government/news/pensions-freedom-for-400000-hardworking-

people-from-today 58. ThisincludestransferringfromaDBpensionschemeintoaDCscheme,orgivingupaDCpensionschemewithaguaranteedannuityrate.59. Market commentary January 2017,CouncilofMortgageLenders,https://www.cml.org.uk/news/news-and-views/market-commentary-january-2017/60. SeeMCOBS4intheFCAHandbook,https://www.handbook.fca.org.uk/handbook/MCOB/4/?view=chapter.Inparticular:

•Forthemajorityofcustomers,firmsarerequiredtoprovideregulatedadvicetocustomersifthereisanyspokenorotherinteractivedialoguebetweenthefirm and the customer during the sale. •Forcertainvulnerablecustomers,salesmustalwaysbeadvised. •Incaseswhereacustomerisahighnetworthorprofessionalcustomer,orwheretheloanissolelyforabusinesspurpose,thecustomercanoptnottoreceive adviceevenifthereisaspokenorinteractivedialoguebetweenthefirmandthecustomerduringthesale.

61. Mortgages Market Study Terms of Reference,FinancialConductAuthority,December2016,https://www.fca.org.uk/publication/market-studies/ms16-02-1.pdf62. Mortgages Market Study Terms of Reference,FinancialConductAuthority,December2016,https://www.fca.org.uk/publication/market-studies/ms16-02-1.pdf63. A guide to mortgage fees and costs,MoneyAdviceService,https://www.moneyadviceservice.org.uk/en/articles/mortgage-related-fees-and-costs-at-a-glance64. Mortgages Market Study Terms of Reference,FinancialConductAuthority,December2016,https://www.fca.org.uk/publication/market-studies/ms16-02-1.pdf65. Our Future Mission,FCA,October2016,https://www.fca.org.uk/publication/corporate/our-future-mission.pdfandConsumer Vulnerability,FCA,February2015,

https://www.fca.org.uk/publication/occasional-papers/occasional-paper-8.pdf66. AccordingtodatafromtheAssociationofBritishInsurers,2014grosswrittenpremiumstotalled£8,920millionacrosspurelifeinsurance,incomeprotection,

standalonecriticalillness,long-termcareandotherprotectionbusiness.TheDeloitteUKInsuranceInsightteamdevelopedamodeltoestimateUKlifeinsuranceprofitsbyproduct2015-25.Profitswerederivedfromestimatedassetsandprofitmarginscombinedwithgrowthassumptions.Theunderlyingdatawasobtainedfrompublicandprivatesourcesincludingannualreports,regulatoryreturnsandanalystreports.FormoreinformationseeUK life insurance futures,Deloitte,January2016,https://www2.deloitte.com/uk/en/pages/financial-services/articles/uk-life-insurance-futures.html

67. Swiss Re’s Term and Health Watch 2012 reports significant increases in UK Life Assurance Protection Gap, overall UK long-term protection market remains resilient in 2011, SwissRe,June2012,http://www.swissre.com/media/news_releases/nr_20120611_Term_Health_Watch.html

68. Term Assurance, UK, June 2015,Mintel,June201569. Term Assurance, UK, June 2015,Mintel,June2015.Note:thepremiumfigureisbasedonconsumerresearchnotindustrypremiumdata70. Term Assurance, UK, June 2015,Mintel,June201571. Term Assurance, UK, June 2015,Mintel,June201572. Term Assurance, UK, June 2015,Mintel,June201573. TheEUGeneralDataProtectionRegulation,Official Journal of the European Union,May2016,http://eur-lex.europa.eu/legal-content/EN/TXT/

PDF/?uri=CELEX:32016R0679&from=EN74. ThisscenarioissimilartoanexampletheFCAgivesinitsfinalisedguidanceonthedefinitionofretailinvestmentadvice.Thisguidancedoesnotapplytoprotection

productswithoutaninvestmentelement.However,thedefinitionofapersonalrecommendationintheFCAHandbookisthesameforprotectionproductsasforinvestmentproducts,sosimilarprinciplesarelikelytoapply.FG15/1 Finalised guidance on retail investment advice,FCA,January2015,https://www.fca.org.uk/publication/finalised-guidance/fg15-01.pdf

75. ICOBS5.3oftheFCAHandbooksetsoutrulesforadviceonprotectionproducts.Thesuitabilityrulesarenotasstringentasforinvestmentproducts,butafirmmusttakereasonablecaretoensurethesuitabilityofitsadviceforanycustomerwhoisentitledtorelyuponitsjudgment. https://www.handbook.fca.org.uk/handbook/ICOBS/5/3.html

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Benjamin LamPartner - Luxembourg Investment Management LeaderDeloitte Luxembourg [email protected]

Patrick LaurentPartner - Technology LeaderDeloitte Luxembourg [email protected]

François Kim HugéPartner - Distribution TechnologyDeloitte [email protected]

Simon RamosPartner - Investment Management Consulting Leader Deloitte [email protected]

Lou KieschPartner - Regulatory Consulting LeaderDeloitte Luxembourg [email protected]

Rahul SharmaDirectorFinancial Services [email protected]

Joy KershawManagerEMEA Centre for Regulatory [email protected]

Peter EvansManagerFinancial Services [email protected]

Rosalind FergussonSenior ManagerEMEA Centre for Regulatory [email protected]

Valeria GalloManagerEMEA Centre for Regulatory [email protected]

Contacts

Authors

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Notes

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