The last few years have seen seismic shifts in the pensions and retail investment market, estimated to be worth around £2tn and expected to grow to around £2.9tn over the next three years (1). The changes we have seen are largely around how these customers’ changing requirements are met.
The market is experiencing convergence on a grand scale – the integration of investment solutions and retail products with financial advice and digital offerings, as providers bid to serve their customers’ needs more holistically. This trend is manifesting itself in different ways. The market is seeing considerable vertical integration and merger and acquisition (M&A) activity, with traditional life and pension providers pivoting towards holistic wealth management models, buying financial advisory firms and digital platforms to bolt ‘digital advice’ services onto their existing offerings. We are also seeing financial advice firms creating their own investment and platform offerings. And recently investment platforms – like Vanguard and Hargreaves Lansdown – have been setting up their own advice shops.
The idea is that convergence will help these firms secure the customer relationship and, more broadly, capitalise on the significant growth opportunities we are witnessing. So, what are the drivers to this growth? One is an ageing population – according to the Office of National Statistics, the UK’s over 75 population is expected to pass 6m this year and grow by another 50% by 2040 to reach 9m (2). In 1946, the average life expectancy was 68.9 years, compared to 87 years for a 75 year old man and 89 for a 75 year old woman today (3). This means people need the right financial advice to be able to fund their increasingly long retirements, and possibly social care in their late old age.
Another driver is the transition from the institutional management of a customer’s wealth down to the individual. For example, a lot of people self-manage their SIPPs, and know exactly how and where it is invested. This signals the importance of education for customers in terms of managing their own money – and the onus is increasingly on financial services providers to do just that. This is core to firms unlocking the customer opportunity – most customers need information when considering purchasing financial products or receiving advice – and links back to the trend around convergence and firms providing a breadth of products and services to meet all of their customers’ needs.
Different types of pensions and retail investment companies approach this challenge in different ways. So, who are the key players and what are they doing around convergence?
Financial advice has a crucial role to play in the future of pensions and retail investments: to help people fund increasingly longer retirements and help with the transfer of intergenerational wealth. Advisers view technology as an enabler to engage and educate their customers, so we expect investment in digital transformation projects to remain high on the agenda, as firms look to create more effective operating models to reduce the cost-to-serve and deliver greater value to customers. A major feature of the advisory environment is that it is extremely fragmented – 89% of firms have less than five financial advisers (4) and three in five firms plan to sell in the next five years (5) – which means we will see a lot of consolidation in the advisory space. Firms will be sold to larger advisory businesses to create economies of scale and provide the breadth of expertise and product that customers need.
Providers of pensions, ISAs, investment portfolios, life cover etc. are keen to own the customer directly too, to engender loyalty and cross-sell their own products. Product providers recognise the intermediary distribution channel will evolve in line with how the adviser market develops, and are aware they will face increased risk of ‘lock out’ from distribution channels (i.e. advisers owning more of the value chain or moving towards a more restricted / tied distribution model).
Platforms will be an increasingly dominant channel for providers to distribute retirement and savings products via intermediaries, with off-platform products either requiring differentiation or being used as solutions to support clients with more straightforward needs. Products that cannot easily be manufactured by advisers will remain attractive propositions – risk-based solutions, lifetime mortgages, protection – but development is required to ensure they are accessible to intermediaries. Product providers will continue to acquire and scale their own distribution capabilities, to provide greater customer access and secure flows into in-house solutions. In the future, we expect product providers to adopt a multi-channel strategy, going direct to customers whilst also enabling intermediaries and corporate partnerships.
In this new era of convergence, platforms will increasingly experience the risk of ‘lock out’, as product providers become tied to specific advice firms. There will also be an acceleration in the growth of the ‘platform as a service’ model, which effectively means advice firms will be able to white label platforms and operate their own. Advisory firms will have a lot to do in terms of development to integrate these platforms into their own infrastructure. Scale for platforms will remain critical, and we expect to see further consolidation of providers in the market, coupled with technology providers accessing alternative routes into market (e.g. similar to FNZs recent partnership with Fairstone (6)).
D2C platforms are also recognising the need to do more to engage and educate customers; with access to significant customer data on their platforms, using that data to engage them using nudges, or giving them personalised insights to encourage more savings and investment, will help providers meet their customers’ needs more holistically. We think the addition of digital guidance and advice services will help platforms attract and retain customers through key life stages. We recognise the growth of episodic guidance and advice services, whereby the customer is engaged at all times, but receives advice at the moments that matter.
Employers also have a role to play in the convergence around the customer. They are witnessing the long-term asset growth from auto-enrolment in pensions and expect that to continue. We are also seeing a shift away from employer trust-based schemes, to master trust and contract-based schemes, giving the end user – the employee – greater access. We will also see employers providing access to broader financial well-being services, to develop a deeper relationship with the employee’s household wealth.
We are already seeing the shoots of this transformation – there has been considerable M&A activity. Recent examples include M&G Wealth buying a national financial advice firm (7), growing their self-employed network model and acquiring a retail adviser platform in Ascentric (8) – this alongside its strategic investment in digital investment platform, Moneyfarm (9), gives M&G Wealth considerable capability to support a large cross-section of customers and advisers in the market.
This move is for firms to generate scale and broaden their offerings, all with the aim of locking in customer loyalty. But to do this effectively, they need to approach digital transformation with caution – providing better propositions for customers requires better integration across financial advice, solutions and technology. The end product – or service – needs to be on point. If it isn’t, they risk alienating the very customers they want to keep.
We believe convergence will create more choice for the customer, whether that’s through a well-known retail brand, a platform, a financial adviser, or their workplace. And fundamentally, the firms that align their services to meet the evolving demands of the customer, and deliver an engaging and rich customer experience with the right approach to technology, will be the ones who stay ahead in this increasingly competitive market.
(1) Estimate based on Alpha analysis
(2) Office of National Statistics (ONS)
(3) ONS Life Expectancy Calculator