Put yourself in the shoes of the average metropolitan millennial. You’re moving ahead in your career, getting closer to the day you’ll finally own your own home, and perhaps considering whether to start a pension or investment Isa.
You might think you’ve got to the stage where you need the services of an independent financial adviser (IFA) — but would they take on a client like you?
All too often, the answer is no. As many young professionals can attest, we don’t have enough money to make the industry worthwhile.
I can argue that my generation needs financial advice more than before. We contend with the shadow of student debt, a collapse in home ownership, and higher levels of self-employment as wages stutter.
Yet call up an IFA, and your youthful voice will be interpreted as the sound of a client with very little money and few assets. Unless you have a high salary, a large inheritance, or are at the outset of a potentially lucrative career, the adviser will unlikely be able to make money out of you. Even if they did take you on, it’s equally unlikely that you could afford their fees.
Help is at hand. A crop of new, digitally delivered services is attempting to bridge the “advice gap,” and some of these ideas are so innovative, slick, and affordable that they might cause the traditional advice profession to fear for its future.
Bridging the advice gap
As the author of the Young Money blog, I was recently invited by Nucleus, a digital platform used by 800 IFAs, to travel around the UK to speak to different firms and see if we could bridge the generational divide.
Starting in the City of London, it didn’t begin well. I kept hearing that millennials were spending too much and saving too little and that financial advice for most young people — bar the Kylie Jenners of this world — was a complete non-starter.
We might not have millions now, but surely some advisers would be prepared to take us on as clients.
After working for 15 years, David Gibson, a 34-year-old physiotherapist, has his own home and some spare cash to invest. But despite extensive online research, he doesn’t know what to do with it.
“I just don’t know who to trust long-term for financial advice,” he says. “I would like someone to look at my overall circumstances and say, ‘This is what you should do’.”
According to the Financial Conduct Authority, only 6 percent of 18——to 34-year-olds took financial advice in 2017. A separate study by Schroders found that in the same year, half of all IFAs turned away clients with less than £50,000 to invest.
Carefree youngsters have never been a core market for the UK’s £4.5bn financial advice industry, which specializes in the complex business of investments, estate planning, and pensions.
A huge regulatory shake-up of how the advice industry can charge for its services is partly to blame. Six years ago, regulators outlawed commission-driven sales of seemingly “free” products.
The hope was that advisers would move away from their traditional charging model. Most now take a percentage cut of assets under management—known in the industry as the ad valorem model—even though only 6 percent of people say they want to pay this way, according to research by advisory firm Drewberry. This model immediately makes younger, asset-light clients less appealing prospects.
Like most people in her age group, Anna Dawson is a self-employed casting director who has never sought financial advice. The 28-year-old rents in Edinburgh and relocated from London to save for her first home, a process she describes as “slow and hard.”
“I have never considered [financial advice] because I can’t afford it. If I don’t work in a month, savings must be put towards rent.”
Her experience underlines financial advisers’ challenges in finding their “next generation” clients.
Buying a home and settling down might have been our parents’ triggers for seeking financial advice; however, rising house prices and changing lifestyles mean our generation is pressing the pause button — sometimes indefinitely.
With more young people working in the “gig economy”, irregular incomes from freelance working play havoc with our ability to save regularly into pensions and Isas. The extent of our problems means financial decisions are often easier to ignore. A recent BuzzFeed article about “errand paralysis” went viral, highlighting millennials’ aversion to everyday tasks, especially if they’re IRL (in real life).
But some digitally driven services want our business and think they can convince millennials that saving and investing are not as anxiety-inducing as they may fear.
Robo solutions
As a young, unmarried millennial managing most of my life and finances online, my biggest financial priorities are meeting freelance deadlines and keeping my new money plant from B&Q alive (ominously, the last one did not survive for long). With the number of digital fintech services available today, finding an old-fashioned adviser does not seem pressing.
The millennium ushered in an online finance boom. DIY investing platforms brought money management to the masses, though you needed serious chutzpah to invest successfully.
The next level is investing using a smartphone and “robot advice, ” which, bizarrely, involves neither robots nor advice (as you and I understand it). Online digital wealth managers such as Nutmeg and Moneyfarm will invite wannabe investors to submit their investment time horizon and feelings about risk, suggesting the best ready-made investment fund. Sometimes, £1 is all you need to get started.
This approach is a boon for overwhelmed millennials who want to get invested and get on with their lives. That is why the Moneybox app has been a game changer. It deploys Richard Thaler’s Nobel Prize-winning “nudge theory” to round up the digital spare change from investors’ purchases — meaning the cost of a £2.90 coffee can be rounded up to £3, and the 10p difference invested in a portfolio of eye-catching stocks including Apple and Disney.
The investment algorithms are the “robots,” but at a basic level, the “advice” they provide is which of their funds best suits your self-diagnosis. Last year, the FCA warned there was “scope for a mis-selling scandal” if poorly designed robot advice models put people into unsuitable funds or gave guidance masquerading as advice.
This is a very important difference. An IFA can give you whole-of-market financial advice — meaning they can advise you on many potential investments and recommend one that’s best for your circumstances.
In a strictly regulated sector, you can’t claim to offer financial advice unless you pass strict exams, meet certain criteria, and have the necessary permission. It’s one reason why the old Money Advice Service had to be rebranded recently as the Money and Pensions Service; such was the uproar among IFAs. And the regulatory burden helps explain why whole-of-market financial advice is so costly.
Even if we could afford it, would the old-fashioned model be right for us?
Max Rofagha: ‘[Young people] tend to have fairly similar, rather straightforward financial set-ups’Minimize, a financial information app, was founded by 31-year-old Max Rofagha in the belief that most millennials don’t need financial advice. Young people, he says, “tend to have fairly similar, rather straightforward financial set-ups. Most haven’t bought a house yet; most aren’t married or divorced yet: their situation is simpler than somebody older.”
Mr Rofagha believes that most millennials, who are starved of financial education but drowning in online resources, need a push in the right direction. To this end, Minimize sends cheeky, emoji-packed emails every day to more than 300,000 subscribers, explaining what’s going on in world markets in an engaging and fun way. A typical subject line is “How do you spell recession?” Currently free, Minimize could, in time, become a paid subscription service.
Minimize threatens what Mr Rofagha calls the “information asymmetry” that has sustained the financial advice industry for decades — namely, that financial matters are so complex you must pay a middleman to explain them. However, he also reckons young people will outgrow the mysterious “black box” of robot advice.
“The financial industry has been clinging to this model of complexity and opacity,” he says. “Millennials want to understand what’s happening with their money.”
This is why Finimize articles provide links to an array of investment options. Sure, robot advisers are on there, but so are cryptocurrency platforms like eToro and stock-trading apps like Free Trade. In fact, ultra-risky cryptocurrency is very popular, dominating the user reviews league table despite Bitcoin’s price plunging by about 80 percent in the past year.
Is there a danger that younger investors are taking on too much risk by making their own financial choices?
Last week, FT Money reported on young investors’ rising interest in crowdfunding, even though few businesses have ever returned cash to investors.
Hayley Ard, a 32-year-old manager at King’s College London’s Entrepreneurship Institute and a Minimize user, used what she learned from Finimize’s investment packs to buy an Innovative Finance Isa.
She chose peer-to-peer lender RateSetter, which currently offers a 4 percent return and a bonus of £150 for customers who keep £10,000 or more invested for one year.
She says: “Many people are priced out of financial advice unless it is a big decision. There are so many options now that democratize information.”
While her choice isn’t without risk — the Financial Services Compensation Scheme doesn’t cover peer-to-peer lending, and borrower defaults can affect returns — she’s satisfied that she doesn’t need financial advice for now.
Advice, please
Nevertheless, some young investors still want more support with financial decisions. One brave online app—Multiply—is determined to provide free financial advice to young, self-employed professionals with an average income of £39,000. Wait—how is this even possible?
For now, Multiply only offers “guidance” but is hopeful it will soon be able to provide “personalized and regulated” financial advice later this year, FCA permitting.
Vivek Madlani, its co-founder, says Multiply is a lecture-free zone. “Young people are fed up with being branded irresponsible,” he says. “Our users are saving for goals and looking to the future to start families. They don’t want to be slapped for how much they spend on flat whites or Asos.
“They want non-judgmental advice tailored to income, earnings, and lifestyle. And they want it in a monthly rhythm, rather than getting a traditional financial plan which gets checked maybe once a year.”
Vivek Madlani: ‘Young people… don’t want to be slapped down for how much they’re spending on flat whites or Asos’ © Multiply
The traditional advisory profession will be watching Multiply’s progress with some nervousness. However, it is not the only financial firm to see potential in the youth advice market.
One wealth management firm has set up an intriguing offshoot — run by young people, for young people.
Neon Financial Planning has a slick website that showcases a range of fixed-fee services, including a free financial health check, half-hour financial coaching for £100, and access to a “Money Info” app for £40 a month. A full financial review costs £750.
These are early clear guidance, while “regulated personal recommendations” on investments or pensions are typically charged at 0.3 percent of the sum invested. Still, they will spell-spelled pounds
spelled poundsIFAs are 50-plus men, and many of their clients are 50-plus. That will end at some point,” says Neon’s co-founder Jon Page. “The way these businesses are set up means younger people are not profitable to them and don’t look like a business opportunity. But I think they are. Many generations of wealth come down to these people, and somebody has to look after them.”
Could you keep it in the family? Traditional financial advice is unaffordable for most young people. However, it could also become irrelevant unless the advice profession adapts to our growing digital demands.
Mr Page may be right to play the long game. According to the Centre for Economics and Business Research, over the next 30 years, millennials will inherit an estimated £5.5tn from baby boomers.
Even if a 50-something in a suit looks after their parents’ money, millennials are not guaranteed to prolong their custom.
Research by Kings Court Trust shows a quarter of inheritance beneficiaries are already walking away from their parents’ or grandparents’ IFAs, typically taking £288,000 with them. Reasons range from physical and personal distance to growing confidence that younger people can manage money for themselves.
Pima, the association for personal investment management and financial advice, has been investigating how it can “forge long-term relationships with future inheritors, wealth builders, and auto-enrollees”—namely, the 4.4 million millennials who are now automatically saving into workplace pensions.
Key recommendations include talking to existing clients about their families’ needs, allowing younger clients to invest lower amounts with “clearly defined products and prices,” and finding new ways to dispense nuggets of financial wisdom—both online and at events.
Sheena Gillett at Pima says its research forum found that young people are still big fans of “human interaction and relationship-building,” with which Mr Page agrees.
“People still value the human touch,” he agrees. “Going on a financial website, answering a few automated questions, getting your card debited can be a bit scary.”
Even the robot advisers recognize that it’s good to talk occasionally. Nutmeg now offers a personalized service, including a 15-minute phone call, for £350. A step up from guidance, this is known as “restricted advice,” as the conversation is strictly limited to Nutmeg’s products and portfolios. However, IFAs should note Nutmeg’s “woke” credentials—it’s the first UK wealth manager to provide environmental, social, and governance scores for all 10 of its ready-made portfolios.
Lisa Caplan, Nutmeg’s head of financial advice, says: “If we find that investing isn’t right for you — for example if you have debts that you should pay off — we will advise you to do that without charge.”
Scalable Capital also offers a free initial phone consultation and charges £200 for restricted advice on its portfolio of investments.
Meanwhile, the new Canadian import Wealthsimple says it offers the same restricted advice as Nutmeg and Scalable over the phone or via email — only for free. Could this be a sign of things to come?
On my trip around the UK, I met many friendly and professional advisers willing to help the younger generation. But the sticking points are cost, convenience, and time. The solution looks to be a clever combination of apps, investment platforms, and a sympathetic ear once in a while, although some advice on keeping money plants alive wouldn’t go amiss.
The cost of old-fashioned advice
Most independent financial advisers (IFAs) were prepared to offer a new client a free initial consultation to establish whether they could help, clarify what they could do, and how much it would cost.
For those advisers willing to take on young clients, the initial fees quoted ranged from 0.3 percent to 5 percent charged on the total value of my investments.
The average fee advisers charge on the VouchedFor online directory is 1.74 percent. Ongoing annual charges range from 0 to 2 percent depending on the nature and size of your assets, with 0.79 percent being the VouchedFor average.
In most cases, this is just what you pay for the privilege of advice—remember that there will be underlying charges on the investments, too.
According to Boring Money, all-in fees for robot advice are usually less than 1 percent.
Some IFAs were prepared to charge by the hour but expected to pay about £180. For advice on taking out new stocks and shares, Isa, a typical quote was an initial fee of about 3-4 percent of the amount invested, with a 0.8 percent ongoing charge.
