The direct-to-consumer (D2C) investment market outlook in the UK for 2023 is positive, with continued growth expected. The availability of low-cost investment products, the accelerated adoption of digital investment platforms, and the increasing demand for ESG investments drive this growth. However, investors should consider their investment goals and risk tolerance before making investment decisions.
The D2C investment market in the UK is a rapidly growing sector as investors seek low-cost, easy-to-use investment platforms. According to a report by the Financial Times, D2C platforms saw their assets under administration grow by 14% to £487bn in the first half of 2021. This growth will continue in 2023 and beyond as more investors turn to these platforms for their investment needs.
One major factor driving the growth of the D2C investment market is the increasing availability of low-cost investment products. According to a report by Deloitte, there has been a significant increase in the number of low-cost investment products available to investors in recent years. This development has made it easier for investors to build diversified portfolios at a lower cost, leading to increased demand for D2C investment platforms.
Moreover, the COVID-19 pandemic has accelerated the adoption of digital investment platforms. According to a report by the Financial Conduct Authority, there was a 43% increase in the use of investment apps and platforms in 2020 as more investors sought digital solutions for their investment needs. This trend will continue in 2023 and beyond as more investors become comfortable using digital investment platforms.
Another factor driving the growth of the D2C investment market is the increasing demand for ESG (Environmental, Social, and Governance) investments. According to a report by BMO Global Asset Management, there has been a significant increase in demand for ESG investments in recent years as investors seek to align their investments with their values. D2C investment platforms are well-positioned to capitalise on this trend, offering investors a wide range of ESG investment options.
What impact does this development have on the future of retail investment advice?
The regulated investment advice market’s future could shift towards a model where clients with lower investments are served by D2C platforms, with advice-only services provided when required and clients with higher investments classed as professional clients.
For this shift towards D2C platforms and advice-only services to occur, there would need to be a widely available advisory model that offers a light level of advisory support to increase the financial activation levels of ordinary investors. In addition, a more comprehensive advisory service would need to be available for times of change, stress, or complexity. To satisfy the Consumer Duty price-value assessment tests, the advisory service fee must depend on the service provided, not on assets under management. This model requires that we pass the financial planning tools to the client most of the time and provide financial education libraries to increase their levels of financial activation.
D2C platforms would likely be more significant in serving clients with lower investments in such a model. These platforms offer lower-cost investment options, which could help to reduce the cost barrier for individuals with lower levels of investable assets. Additionally, these platforms often provide automated investment management and financial planning tools to help individuals make investment decisions based on their goals and risk tolerance.
For clients with higher levels of investments, as client literacy levels improve, advisers may shift towards an advice-only model, providing personalised advice and recommendations as needed without directly managing their investments. This model would allow advisers to focus solely on providing advice that is in the best interests of their clients without the potential conflict of interest associated with managing clients’ investments.
Furthermore, clients with the highest levels of investments could be classified as professional clients, exempting them from certain regulatory protections. This distinction would allow advisers to provide more sophisticated investment advice and recommendations to these clients, which could lead to better outcomes for them.
However, there are some potential drawbacks to this model. For example, individuals with lower levels of investable assets may have less access to personalised advice and recommendations than those with a traditional adviser-client relationship. Additionally, individuals may need to be financially literate enough to effectively utilise the tools and services offered by advice-only planners and D2C platforms.
FT Adviser reported last week that a survey of 2,000 consumers by consultancy group Definition found that financial institutions – and consumers – may greatly overestimate their understanding of key financial terms. Financial literacy levels certainly need to be improved to see better consumer outcomes if consumers were to become more empowered to manage their own finances.
The regulated investment market is a complex industry with a range of products and services that cater to investors with varying levels of investable assets. The debate over whether the market is commoditised for clients with lower levels of investable assets has been ongoing for some time. Some argue that raising the investable asset thresholds for advisory services is necessary to satisfy value-price assessments post-Consumer Duty. However, others argue that doing so may lead to losing credibility as a retail investment adviser.
On the one hand, raising the investable asset threshold for advisory services may allow advisers to provide more personalised services to high-net-worth individuals. By doing so, they can better cater to their client’s unique investment goals and objectives. Moreover, providing such customised services can lead to better client outcomes, which aligns with Consumer Duty’s objectives.
On the other hand, raising the threshold may lead to losing credibility as a retail investment adviser. Clients may perceive such advisers as catering only to high-net-worth individuals and not being interested in serving the needs of the broader market. Moreover, such advisers may be seen as elitist and out of touch with the needs of average investors.
According to the Financial Conduct Authority, retail clients are ” not professional or eligible counterparties.” Suppose the investable asset threshold for advisory services is above €500k. In that case, it may not be easy to classify such services as retail, given that many clients with such assets may be considered professional or eligible counterparties.
The decision to raise the investable asset threshold for advisory services is complex, with pros and cons. While doing so may allow advisers to provide more personalised services to high-net-worth individuals, it may also lead to losing credibility as a retail investment adviser. Suppose the new threshold is above €500k. In that case, it may be difficult to classify the service as retail, which could lead to further confusion. Ultimately, advisers must weigh these factors and make a decision that is in the best interests of their clients and their business.
Another option for retail-focused financial advisers may be to move to an advice-only financial planning model and increase clients’ financial activation levels to access D2C investment platforms. This model has several benefits, including increased transparency, reduced conflicts of interest, and lower client costs.
In an advice-only model, advisers provide general advice to clients but do not provide specific advice on particular investments, make recommendations, or manage their investments directly. Instead, clients are responsible for implementing general advice through publicly available surveys, self-directed investments or with the assistance of a third-party investment platform. By doing so, advice-only financial planners can focus on providing high-quality advice and recommendations without being influenced by the potential financial gains associated with managing clients’ investments.
This scenario raises two crucial questions:
- Is there a significant difference between investment options in a commoditised market, and is regulated investment advice necessary?
- How much value can be placed on such a service in a value-price assessment?
Additionally, increasing clients’ financial activation levels to access D2C investment platforms can provide greater accessibility and affordability for clients. Many D2C investment platforms offer low-cost investment products, which can help reduce client costs. Moreover, by increasing clients’ financial activation levels, advisers can help ensure that clients are better informed and equipped to make sound investment decisions.
Moving to an advice-only model can reduce conflicts of interest when advisers provide advice and manage clients’ investments. For example, the use of inheritance to pay down debt or pass it on to the children. Such conflicts can arise when advisers recommend investments that may not benefit the client’s best interest but benefit the adviser financially. By removing the investment management aspect from their services, advisers can avoid such conflicts and focus solely on providing unbiased advice.
Such a model can provide several benefits, including increased transparency, reducing conflicts of interest, and lower client costs. Ultimately, the decision to move to such a model will depend on individual advisers’ business goals, the needs of their clients, and their regulatory requirements.
Meeting the needs of low-level investment clients can be achieved through planners increasing clients’ financial activation levels to access D2C platforms. In contrast, professional and eligible counterparty client service propositions best serve high-level investment clients.
In conclusion, the £5bn annual market for retail adviser fees in the UK raises an essential question about its future. If low levels of financial literacy did not disguise charges, there was a clear distinction between planning and regulated advice, and the convenience of facilitated deduction of adviser fees from products was not prevalent, how would this market evolve? A range of factors, including regulatory requirements, technological advancements, and changes in consumer behaviour, will shape the future of the regulated investment advice market. While the D2C platform model, supported by advice-only services, may be one potential future, its impact on the investment advice market remains to be seen.