I was asked the other day about my worst prediction ever made. My answer may surprise some, but it was the view that intermediaries would disappear as technology takes over. I made that prediction about independent financial advisors back in the 1990s as call centres appeared. It didn’t come true.
Since I made that prediction, I’ve heard the word disintermediation used liberally by technologists, predicting that technology can match people and act as the intermediator. I’m not so sure.
I guess it’s my years of working with and understanding banks and insurance companies, and finding that there is a reason why they intermediate successfully which is attributed in great extent to their regulatory oversight. For example, talking with Accenture at a recent meeting, they told me they had run an extensive piece of consumer research into this, and the answers are interesting.
In 2018, they surveyed 47,000 banking and insurance customers across 28 markets in Asia-Pacific, Europe, Latin America, Middle East and Africa, and North America, and this was the second annual research they performed. They found consumers were more trusting of their financial firms, but trust broke down into three parts. First, they trust them not to lose their money; second, they trust them to keep their data safe; third, they don’t trust them ot do the right thing.
The last is not surprising for me, but the first two are the keys as to why intermediaries are still here and why banks and insurance firms have not been disintermediated. I trust them to keep my money and my data safe. I don’t trust their brand, their company, their executives or their advice, but I trust them to keep my money and my data safe.
Now, that’s the core of why intermediation is key, and why independent financial advisors (IFAs) are still needed as yes, I need advice, but not from someone who will sell me the wrong product (which IFAs are meant to avoid, even though they’re on commission in many cases). For example, in another research report into UK IFAs*, there were 5,281 financial advisor firms in the UK at the end of 2017, of which 87% were independent. Financial advisors accounted for 58% of retail investment sales in H1 2018 and they are the second most preferred way to invest (28.3% of investors use financial advisors) behind investing directly with the financial providers (used by 31.4% of investors).
Interestingly, the number of firms has risen by a third since 2000, when there were around 4,000 firms, which was down from double that number (8,500) in 1990.**
In other words, intermediation of finance is not a simple affair, which many technologists believe it is. Most people are nervous about money – it’s not taught in school. They feel it is hard to deal with and need to trust that when they have it, it won’t be lost and that if they want to invest it or use it, that they can talk to someone about it.
All in all, I believe disintermediation can happen with technology, but only for those comfortable with money and technology. That’s not everyone. It tends to be more mature customers who have been generating wealth or borrowing of a substantial nature over a good period of time. It’s not for someone who just got their first amount of money of any substance and fear losing it. That’s why there will always be a role for independent intermediaries and regulated intermediation.
That’s my view anyway.