Many of the UK’s independent financial advisors (IFAs) will be forced to alter their businesses in line with the emergence of online Open Finance according to a new report by Forrester Research (Nasdaq: FORR).
“Open Finance will be fronted by a new type of player that aggregates customer-account information and offers a comprehensive range of best-of-breed products,” said Forrester Analyst Benjamin Ensor. “These emerging Open Finance companies threaten IFAs because as well as offering advice and best-of-breed product choice they know their customers, actively offer advice, link recommendations directly to transactions and package dynamic solutions.”
To thrive in Open Finance, Forrester believes advisors must focus on the service that customers really value — the reassurance of a relationship with a particular advisor. Under pressure from new competitors and low-cost advice, IFAs must develop tools to enhance advisors’ efficiency and move toward a fee-based structure.
The Internet threatens at least six of the seven elements to the service offered by IFAs. The first four — product information, choice, discounts and simplified process — have already become commodities online. Advice and long-term planning, the core of the IFA’s offering, are under threat. Having automated the advisory process, online advisors can offer advice at a very low marginal cost — and even complex long-term planning can be automated. Only the reassurance brought by an individual advisor’s intimacy with a customer’s financial affairs cannot readily be automated.
“Most IFA firms are too small to compete in online financial services,” Ensor continued. “IFA firms have the strong customer relationships required for Open Finance. But the lack of IT resources, small scale and low brand awareness mean that IFA firms must partner to compete for online customers.
“The IFA industry will fragment as firms are forced to specialise — the large generalist IFA firms will seek partnerships to become Open Finance players and the large specialists will become supermarkets. Small IFAs will be forced to specialise in providing niche services such as long-term estate planning, advising expatriate Britons on tax issues or advising employees on company benefits like options and pension schemes,” he said.
For the report “Online Financial Advice hits The UK,” Forrester spoke to a cross section of 40 UK independent financial advisor firms and industry associations and regulatory bodies.