The first thing to note about the UK long-term savings market is its size. The UK asset management industry manages nearly £8tn of assets, 2/3rds of which are the longterm savings of UK citizens. This already large market is also sub-scale. Basically, lots of people don’t have any longterm or even short-term savings (25% of adults don’t have ANY savings at all – Skipton Building Society study 2018). And those who do save, don’t have enough. That’s why we have pension auto-enrolment and mandatory minimum pension contributions by both company and employee, and rules that will increase both in the near future. So £6tn+ is undercutting the potential of, indeed the necessity of, the market.
Entrepreneurs, please pay attention. This isn’t some small and saturated payments app market. This market dwarfs all others in the financial services sector.
Poorly served consumer market
The second thing to note is that the consumer is poorly advised, a point made abundantly clear in the FCA’s Financial Market Advice Review in 2016. In addition, the consumer doesn’t trust longterm savings products, the providers of those products or indeed their own judgement in respect of either product or provider. I’m not surprised about this as everything we hear tells us we are stupid (‘seek advice, you can’t do this alone’) and it’s all so very, very complicated. For example, if you are savvy and wealthy enough to use a platform you’ll be expected to pick from 1000’s of products, even after you have applied what limited and unhelpful filters the platform might provide. This is ridiculous.
My wife agrees. She is a super-rational, intelligent, analytical ex-McKinsey-ite who makes decisions by constructing frameworks to segment the available options. Have you ever been forced to discuss which kettle you should buy by debating the scores allocated to 20 different products using a 15-dimensional matrix in a spreadsheet? I have. And her comments about platforms are moot: “This is ridiculous. How am I supposed to decide? There are no ratings, no way of building my own ratings and no way of determining value for money! Where are the reviews? And the fund information on the platform is different from that in the factsheets”. Yes, she actually reads the factsheets and tabulates what she reads, and it’s nearly always different between platform and fact sheet.
And with that she has nailed the problem. There is no way of comparing products, no independent reviews (with the emphasis on ‘independent’) on platforms (either retail or pension provider), and all are couched in the most awful gobbledygook. In the end, she turned to me and said “You’re the expert, you tell me”. I caught the dangerous look in her eye and bit back the ‘I’m not a financial adviser’ comment that was forming and told her something I firmly believe which is, “it’s all about trust”. And look for cues elsewhere to help you determine trust. Use the same process for selecting your asset manager as you would your friends. Have they ever done you or the ones you love and trust wrong? If they’ve not done anything wrong, are they actively good in other circumstances?
Fortunately (or unfortunately), I have plenty of examples from my work as Transparency campaigner to offer some trust-based (or lack-of-trust-based) selection criteria. This is possibly quite sad but also might give us a way forward when creating an independent recommendation list as at least some of the selection criteria should be cultural (gender diversity, charitable contributions, ethical stance on any of a number of issues…) and/or what a manager is doing when no-one is looking (does it ruthlessly pursue those who level alleged insult, for example).
Sadly, the issue with trust and asset management does not stop with mass miscommunication, misinformation and complexity. There is still the matter of the screw-ups – the legacy poor products in which people’s funds are left to dwindle away. The miscalculations – everyone should check their contributions are correctly calculated and applied. The possibly inadvertent dodgy practices – failing to notify you that if you fail to make active contributions (you lose your job, for example) then the provider still needs to be paid (fair) and it will ensure payment by selling units rather than asking for nominal cash sums (unfair, as once you’ve lost a unit it is gone forever); or failing to migrate you to a newer and better/cheaper shareclass when it is introduced, leaving you in an expensive older product. And these are just the tip of the error iceberg perpetuated by the authorised and reasonable part of the market. On top of this are the scams. Remember the sharks that were circling Carillion or BHS.
The point I’m trying to make is simple; the market is riddled with misinformation and distrust, and ripe for disruption. Entrepreneurs, once again pay attention as the sort of disruption needed is the sort of disruption with which you are so adept. Getting the attention of the consumer, or building something that is designed with the consumer rather than financial intermediary in mind (B2C rather than B2B in other words), is the very essence of the disruption the banking markets have faced from fintechs over the past decade. Think Transferwise (I hold them as the exemplar of aggressive marketing and awareness building), Syndicate Room (in my opinion, the best of the Equity Crowdfunding platforms) or any one of hundreds of payment apps that have appeared over recent years.
Sadly, the number of start-ups that have decided to face the pensions market, for example, I can probably count on the fingers of one hand. Yes, there is burgeoning interest in robo-advice as a space, but the proof of the pudding is in the eating, and we are still stuck in a world where we are still almost all under saved or ‘not-at-all-saved’.
So what’s the problem? Well, the first thing is that advice is a scary and highly regulated space. Basically, there are high barriers to entry and the risk of getting it wrong is heavy punishment, so maybe entrepreneurs are scared. I challenge this as true entrepreneurs are afraid of nothing, and there are still plenty of sharks willing to give it a go. The B2C space should be a shoe-in for the entrepreneur. It’s huge, under-served and has the sort of problems that digital entrepreneurs should love to solve.
Is there anything else? Yes, as a matter of fact there is and it’s a matter of inefficiency. The long-term savings market is complex, heavily intermediated, with manual intervention needed in many processes (transfer agents still use faxes in some cases [facepalm]), and therefore woefully inefficient. How inefficient? When I first started looking into this issue of complexity and intermediation over 12 years ago I wrote a paper on the subject for the Government Office for Science in which I identified at least 16 levels of intermediation in the manufacture and distribution of an equity ISA. The result was an estimated drain on assets of 3-4% per annum. Think of how inefficient a pension could be, with multiple fund types beyond simple equity, and several layers of intermediation over and above those used to manufacture and distribute a single, simple product. Estimates vary, but let’s apply a simple figure of 3% to the £6tn AUM total I mentioned at the beginning. This means that the cost of the complexity may be over £180bn per annum.
Entrepreneurs, pay attention for the last time as a share of this total could be yours. To digitise at least part of this inefficiency would represent a huge market for you. For example, take out just 10bps of cost and you would be removing £6bn from the system. Keep 1bp for yourself, or £600mn, and give the rest back to the consumer (£5.4bn) as performance; for if it’s not a cost it is performance. And with that you will also be hitting your social-benefit goals too, as the savings you make for the consumer will compound over time.
Sadly, the issues here are that the processes are complex, poorly understood outside the industry and are therefore a barrier to new entrants. Most digital entrepreneurs, whilst having innovation, entrepreneurial and technology skills aplenty, know little or nothing about the industry.
The Technology Exists
I’m not going to labour the point, but the technology exists. With distributed ledgers and blockchains we can make information ubiquitous and safe, and the unit cost of operations low. With machine-learning and AI we can digest, understand and act on unprecedented amounts of information from huge volumes of structured and unstructured data. With High Performance Computing (HPC) we can process and store that data, and power incredibly sophisticated visualisation tools that can interact with managers and consumers in new ways. The age of ignorance, or at least the age of the excuse of consumer ignorance, should be over.
Did you known there is a High-Performance Computer in the north of England so powerful that is one of the largest, if not THE largest, supercomputers in Europe that is hooked up to one of the largest visualisation suites in Europe? It’s a public asset and its flagship project is helping a luxury car manufacturer design and sell its cars. Is it used to help build or demonstrate better long-term savings products? No. It’s used to support a market that represents probably less than 0.01% of demand the UK population. It’s not the fault of the scientists that run the site though. I lay the blame at the feet of an industry that seemingly doesn’t want to innovate. If it did, then it would have shouldered its responsibilities and built programmes to educate consumers, products suitable for the less-than-wealthy, and operations fit for the 21st century.
But where’s the end of the journey? What’s my vision for the future once innovation is the norm for the longterm savings market? What I see is powerful and scalable ‘Artificial Intelligence’ that effectively allows everyone to have their own personal asset manager that tailors’ investments to an individual’s needs and their predicted cashflows. All this supported by DLT/Blockchain infrastructure that allows the unit cost of trading and owning a single asset to be the same as the unit cost of trading and owning thousands. In other words, scale economies are a thing of the past and buying just one asset is cheap and easy. Portfolios can be bespoke to the individual and matched to both needs and preferences.
It all starts with transparency though, but goes via innovation and entrepreneurs.
Written by Christopher Sier – Chairman at ClearGlass & AgeWage