<Me> "Alexa, how long until I can retire?".
<Alexa> "It's not looking great, Tim. You've overspent your budget for Shopping and Entertainment, and you are due to pay your mortgage tomorrow which will make you overdrawn. You don't get paid until next Tuesday so I'll need to move some money in from your Savings account to cover it. If current spending trends continue, I estimate you will need to keep working for an extra three years beyond your current target retirement date."
We need financial advice more than ever before – with worldwide interest rates at rock bottom since the last financial crisis, the UK savings ratio has plunged to an all-time low of 1.7%.
Recognise this scenario? That's because according to the FCA's Financial Lives Survey, nearly half of UK adults have limited financial knowledge, 4.1 million people failed to pay bills or credit commitments in three or more of the last six months, and two thirds of 45-54 year olds have not prepared for retirement1.
All of this adds considerable stress to employees in the workplace, with 59% saying that 'current financial worries' prevent them from performing their best at work. Across the UK, financial stress is estimated to cost the UK economy £121 billion in lost productivity per year3.
In the past, banks and Investment Advisors (IAs) provided free financial planning and investment advice in return for earning commission from the investments they sold. The 'Retail Distribution Review' (RDR) regulation3 has changed this by abolishing commissions and forcing IAs to charge for 'advice', but in the process an "advice gap" has opened up, as some customers baulk at parting with hard-earned cash for advice.
The problem is, we need financial advice more than ever before – with worldwide interest rates at rock bottom since the last financial crisis, the UK savings ratio has plunged to an all-time low of 1.7%, the UK "savings gap", being the gap between retirement expectations and the cost of funding such expectations, is estimated at £314B4. And with the new Pension Freedoms meaning Pensioners can go into "Drawdown" instead of buying an Annuity, nearly half a million retirees have taken this option, but a third of them have no experience of being invested in the stock market5.
But can new standards and technologies help address this 'Advice Gap'? With the advent of open banking since January 2018, established banks and their digital challengers have been quick to enable customers to 'link' accounts from other banks into their Mobile Apps, giving customers a 'single view' of their bank balances and transactions for the first time. Adoption by customers is growing gradually, but the real benefits for consumers are emerging now as banks and fintechs use the aggregated account and transaction data to generate helpful insights into spending patterns, and nudge customers to stay within budget. With 'open banking payment initiation' standards coming into force in 2020, AI is being used to move money or make payments on your behalf to stop you going overdrawn or missing a payment.
Financial wellbeing goes beyond day to day money management. A family that is in the black, but has no long term plan to achieve the desired lifestyle in retirement, or has no protection in place to withstand financial or health related shocks, needs to be nudged to take action now. Whilst the best time to start saving for a pension might have been 20 years ago, the second-best time to start is now.
Yet gaining a picture of whether you are on track for your retirement and how to get back on track is not easy. With final salary pensions becoming a perk of the past, and employees having an average of 11 jobs in a lifetime6 most of us have acquired "defined contribution" pension pots with each of our previous employers.
In 2016, the government announced a commitment that 'Pensions Dashboards' would be created by the pensions industry, enabling everyone to view details of all of their pensions together – a kind of "open pensions" initiative. Then in April 2019 announced that "Industry would design and develop its own dashboards. The Single Financial Guidance Body – now the Money and Pensions Service - would convene a delivery group to help ensure that this happened safely and securely. Multiple dashboards would improve consumer choice but should exist alongside a non-commercial dashboard hosted by the SFGB offering an impartial service to those who prefer it." In the last Queens Speech the Government said that it would introduce a Bill in the 2019-21 Parliament, legislating to require pension schemes to provide individuals' data (with their consent) via pensions dashboards.
The potential is for digital innovators and fintechs to create 'robo-advice' platforms that give customers a holistic view of their day to day and long term financial wellbeing by aggregating open banking data from banks, and pensions dashboard data from pensions companies, and then giving smart nudges to customers adjust their spending behaviour and take action to get their long term plan back on track.
Whilst financially savvy customers might be tempted by these new "Robo-Advisor" Apps, many customers approaching retirement still need the advice and reassurance of qualified Financial Planning experts to help their customers navigate the significant complexities of all the new retirement options.
Some industry observers refer to the emergence of 'Bionic Advisors' – human IAs who have access to digital platforms that provide the richest sources of product data, and powerful predictive analytics algorithms and data visualisation capabilities like Synaptic Software, that augments their ability to improve the long term financial wellbeing of more and more of their customers.
So hopefully not too long before I hear this advice from Alexa:
<Alexa> "Good news Tim. Rachel your Financial Advisor has some ideas on how to invest the money you saved last month in your workplace pension. RacheI advises that you keep that up for the next 12 months, as it will increase your expected retirement income by 5%."
- FCA Financial Lives Survey
- Capita Financial Wellbeing research with Manchester University: https://capita.turtl.co/story/5c3df78ccb9c2a3dedf00fb7
- Retail Distribution Review regulations
- Office for National Statistics (ONS)
- ThisIsMoney - YouGov Survey for Zurich UK
- Pensions Dashboard Website
- House of Commons Briefing Paper – Pensions Dashboards 21/01/20