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 simply don’t have enough money — yet — to make it worth the industry’s while.
It is possible to argue that my generation is in greater need of financial advice than those before us. We have to 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 very few assets. Unless you have a high salary, large inheritance or are at the outset of a potentially lucrative career, it’s unlikely the adviser will be able to make money out of you. Even if they did take you on, it’s equally unlikely that you would be able to afford their fees.
Help is at hand. There is a crop of new, digitally delivered services attempting to bridge the “advice gap” — and some of these ideas are so innovative, slick and affordable, 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 might 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 he doesn’t know what to do with it, despite extensive online research.
“I just don’t know who to trust long term for financial advice,” he says. “What I would really like is someone to look at my overall individual circumstances and say ‘this is what you should do’.”
According to the Financial Conduct Authority, only 6 per cent of 18-34-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, whose bread and butter is the complex business of investments, estate planning and pensions.
A huge regulatory shake-up of the way 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 per cent of people say they want to pay this way, according to research by advisory firm Drewberry. This model immediately makes younger, asset-light clients a less appealing prospect.
Like most people of her age group, Anna Dawson, a self-employed casting director, has never sought financial advice. The 28-year-old rents in Edinburgh and relocated from London to save for her first home on her own, a process she describes as “slow and hard”.
“I have never thought about [financial advice] because I can’t afford it. If I don’t work in a month, savings have to be put towards rent.”
Her experience underlines the challenge that financial advisers will face in finding their “next generation” of clients.
Buying a home and settling down might have been our parents’ triggers for seeking financial advice but 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 a very millennial aversion to workaday tasks, especially if they’re IRL (in real life).
But there are digitally driven services out there that not only want our business but think they can convince millennials that saving and investing is not as anxiety-inducing as they may fear.
As a young, unmarried millennial, managing most of my life and finances online, I find my biggest financial priorities are meeting freelance deadlines and keeping alive my new money plant from B&Q (ominously, the last one did not survive for long). With the number of digital fintech services available today, the need to find 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 on your own.
The next level is investing using a smartphone and “robot advice”, which, bizarrely, involves neither robots nor advice (as you and I understand it, anyway). 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 for them. Sometimes, £1 is all you need to get started.
This approach is a boon for overwhelmed millennials who just want to get invested and get on with their lives. It’s 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. The FCA last year warned that 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 what’s called whole-of-market financial advice — meaning they can advise you on many different potential investments and recommend one that’s best for your individual circumstances.
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 who is older.”
Starved of financial education but drowning in online resources, most millennials just need a push in the right direction, Mr Rofagha believes. 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 a way that’s engaging and fun. A typical subject line — “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 to you. 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 have a clear understanding of 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 such as eToro and stock-trading apps such as Free trade. In fact, ultra-risky cryptocurrency is very popular, dominating the league table of users’ reviews, despite Bitcoin’s price plunging by about 80 per cent in the past year.
Is there a danger that by making their own financial choices, younger investors are taking on too much risk?
Last week, FT Money reported on the rising interest in crowdfunding by young investors, even though very 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, drew on what she learnt from Finimize’s investment packs and ended up buying an Innovative Finance Isa.
She chose peer-to-peer lender RateSetter, which is currently offering a 4 per cent return and a bonus of £150 for customers who keep £10,000 or more invested for one year.
She says: “A lot of people are priced out of financial advice unless it is a big decision. There are so many options now that democratise information.”
While her choice isn’t without risk — peer-to-peer lending isn’t covered by the Financial Services Compensation Scheme, and returns can be affected by borrower defaults — she’s satisfied that she doesn’t need financial advice. For now.
Nevertheless, some young investors still want a greater level of support with financial decisions. One brave online app — Multiply — is determined to provide free financial advice targeting 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 “personalised 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 down for how much they’re spending on flat whites or Asos.
“They want advice to be non-judgmental, 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 a degree of nervousness. But 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 showcasing a range of fixed-fee services including a free financial health check, financial coaching at £100 for half an hour and access to a “Money Info” app at £40 a month. A full financial review costs £750.
All of these are clearly labelled as generic guidance, while “regulated personal recommendations” on investments or pensions are typically charged at 0.3 per cent of the sum invested, but will be spelt out in pounds.
“Traditional IFAs are 50-plus men, a lot of their clients are 50-plus. That is going to 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. A lot of generational wealth is coming down to these people and somebody has to look after them.”
Keep it in the family
Traditional financial advice is unaffordable for most young people. But unless the advice profession adapts to our growing digital demands, it could also become irrelevant.
Mr Page may be right to play the long game. Over the next 30 years, millennials will inherit an estimated £5.5tn from baby-boomers, according to the Centre for Economics and Business Research.
Even if their parents’ money is looked after by a 50-something in a suit, there is no guarantee that millennials will 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 given range from distance — both physical and personal — to growing confidence that younger people can manage money for themselves.
Pima, the association for personal investment management and financial advice, has been looking into how it can “forge long-term relationships with future inheritors, wealth builders and auto-enrollees” — namely the 4.4m millennials who are now saving automatically into workplace pensions.
Key recommendations include talking to existing clients about their family’s 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” — something Mr Page agrees with.
“People still value the human touch,” he agrees. “Going on a financial website, answering a few automated questions, getting your card debited — it can be a bit scary.”
Even the robot advisers recognise that once in a while, it’s good to talk. Nutmeg now offers a personalised 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 own 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 consultation over the phone, charging £200 for restricted advice on its range of investments.
Meanwhile, new Canadian import Wealthsimple says it offers the same level of restricted advice as Nutmeg and Scalable over the phone or email — only for free. Could this be a sign of things to come?
On my trip around the UK, I met a lot of friendly and professional advisers who were 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, initial fees quoted ranged from 0.3 per cent to 5 per cent charged on the total value of my investments.
The average fee charged by advisers on the VouchedFor online directory is 1.74 per cent. Ongoing annual charges range from 0 to 2 per cent depending on the nature and size of your assets, with 0.79 per cent as the VouchedFor average.
In most cases, this is just what you pay for the privilege of advice — don’t forget there will be underlying charges on the investments too.
According to the website Boring Money, all-in fees for robot advice are usually less than 1 per cent.
Some IFAs were prepared to charge by the hour — but expect to pay about £180 an hour. For advice on taking out new stocks and shares Isa, a typical quote was an initial fee of about 3-4 per cent of the amount invested, with a 0.8 per cent ongoing charge.