Like the best Iron Maiden tracks, this long and epic five parter on Open Finance must come to a finish.  So it’s time for some hardcore futurology and look at how Open Finance will change the long term savings industry.  And what might well stay exactly the same.

Consolidation, lots of consolidation

Let’s do the easy one.  There are too many pensions pots and not enough saved in pensions.  Pensions Dashboard will start the slide but if Open Finance is a more open market, and in particular if it’s used to deal with the small pots issue, then we will see consolidation become the norm.  This starts to have a few consequences.

Pricing and actuarial “stuff”

The economics of workplace pensions are essentially that a scheme will have “a small amount of money for a long time” and are charged on that basis.  But what are the impacts on those “very complicated spreadsheets”  actuaries across the land use to work out profitability on pensions if it moves to “quite a bit more money over much less time”?  In general, one hopes that not having to send so many annual statements will mean costs fall but I can hear my old actuarial chums sucking teeth already. Especially when combined with the next point.

Old to new books

For decades the story has been about money pouring out of DB into DC. But really where I see the consolidation is within DC. And firms running old back books need to be worried. The flow will be into newer, shinier (and cheaper) open books of business.  Quite a lot from workplace to platforms if I am any judge. 

Good news for the likes of Hargreaves Landsdown or PensionsBee. Not so much for Phoenix or all the old LifeCos hanging onto some pretty big sacks of old policies. And interesting for NEST perhaps?

Good thing too

I know people will always step in on LinkedIn and elsewhere that a transfer is not always the right thing, etc, etc.  But in general, if you’re moving from a policy written 20 years ago to a new one you will have a much lower charge, better communications and digital services and won’t be in a single managed fund.  Also Open Finance makes it easier to see if it is in your interest or not.   

Also, why should providers get away with just keeping people’s money without earning it? It’s called competition and it’s usually a good thing for consumers.

Better products?

So increasing competition is all good but really Open Finance will have failed unless it brings about better products that help people. 

Ever since pensions freedoms came in there has been a lot of gnashing of teeth about how to help people make decisions when they reach retirement.  In particular the people who cannot, or will not, take full fat financial advice.  It’s here that I think the more difficult and ultimately far more valuable prize is. 

Firstly, Open Finance will provide more data on which to quickly assess a person’s likely needs in retirement and of course the thorny question of how much they have saved to this point. 

But also, and even more useful, I think Open Finance will mean that it’s possible to make financial decisions much closer to the time they come into force.  After all, why at 60 am I somehow going to know how much I will need to spend when I am 75?  At 49 I have very little idea what I am likely to spend next year! Open Finance I think will allow for me to draw down on my savings at the time of need, and using the best vehicle to do so, be that ISA, GIA or Pension. With a minimum of faff or thinking. 

So what about advice? 

I have been in the industry for 25 years and every one of those years have read an article saying that the days of Financial Advisers are numbered. Not so far. In fact my pals at the Lang Cat still report that there is a colossal advice gap.  You can find the Lang Cat Report here.

Of course what the report also says is that a lot of people are not willing to pay the cost of advice at the moment. 

What Open Finance can do is democratise advice by making it much quicker and easier to provide.   A lot of time spent “giving advice” is actually finding out about the customer.  Open Finance can do that in the blink of an eye if implemented well.  At which point it becomes about how the customer chooses to consume the outcome of that information.  Chatbot, Teams/call,  meeting in an office.  Whatever suits them and the advice firm’s model. 

It’s not advice that is going away but tedious fact finding. 

The rise of D2C and a problem for the regulator

Whilst I don’t think advice is going away I think that direct to consumer is going to continue to grow and in part that will be driven by Open Finance.  Once people understand their position and can see the real price and value of different products in accumulation why wouldn’t they feel able to transact without advice?  Note I am talking about the mass of the UK population who are a long way away from considerations like annual allowance and the like. 

The thing is that this causes the regulator a headache.  The moment you know stuff about the client it starts to look like individual advice and that has big meaning.  It’s already causing palpitations at the FCA when they think about Pensions Dashboards. 

But for me, this needs to be rethought.  If I know nothing about my customer it’s OK to directly sell them a product regardless of whether it’s suitable or not but if I do the right thing and find out about them and sell them a product only if appropriate, I am now in trouble?  Doesn’t feel right to me.

So please can we have individual guidance or non-advised segmentation please Mrs FCA?  Thanks. 

Summary and what will not change

But there’s one thing that will not change with Open Finance. People will not magically become “engaged” and decide to save a lot more on their own. They will still need to be persuaded to save rather than spend.  At best, all that Open Finance can do is make it a bit easier to make that case to them. 

The last point is a confession. We don’t know what will happen.  Just that Open Finance will drive change. In ways we simply cannot predict now. After all, 20 years ago everybody knew the internet was going to change all sorts of industries.  Not sure anybody predicted the collapse of the black cab taxi trade and whilst the world’s second richest man runs a car company?  

Thank you for following this little trip though the possibilities of Open Finance.  If you would like to discuss more with me and perhaps look at the potential impact on your business please get in touch.