UK Adviser spoke with John Milliken, chief executive of the research firm Defaqto, who has said that financial advisers should embrace data and technology.
Milliken was appointed as chief executive in March 2021 and, before joining Defaqto, was chief executive for Speechmatics.
He reveals his insights into the firm, including Defaqto’s recent developments, current trends in the IFA market, and where he thinks the advisory industry is headed.
What current trends are you seeing in the IFA market at the moment?
Recently, interest rates have impacted the performance of UK equities and the gilts and bond market. The interest rate rise system increases the yield of government debt and these together make UK equities less attractive. So, when clients ask their adviser why their portfolio is not outperforming inflation in the way it has over previous years, this is because of the current economic cycle. I expect that if interest rates go down, portfolios will start to outperform again.
The consolidation of the IFA market is another big trend. Many firms have been acquired, merged together, and other larger and older private equity companies are thinking in that area. We’re now starting to see the more traditional companies coming back into the market, so although consolidation will continue, this will be centred around coalescing those more traditional levels in the market.
Another area I’ve an eye on as we move into 2024 is political volatility. Specifically, what’s going to happen with the UK general election and the impact this will have on personal finances and areas such as inheritance tax.
Are there any product launches on the horizon?
We have an extensive roadmap of development. We’re doing work on User Experience (UX) and User Interface (UI) for Defaqto Engage. This is an all-in-one system that allows advisers to model a client’s financial objectives, capture risk profiles, conduct investment research, produce suitability reports and oversee client reviews. This will make the user experience even more intuitive.
We’re also working on ensuring the tools are applicable for restricted or vertically-integrated advisors, such as those who tailor portfolios on a client-by-client basis.
Through the user experience, we’re looking at different workflows, so the tool can be used by those that have central investment propositions or are restricted because of the approach of the firm they work for.
Where do you think the industry is headed and what opportunities are there for advisers in 2024?
The financial adviser will continue to play a strong role. People still find the investment market complex, but also really important because of their financial future.
Clients don’t want to talk to a machine, but to a human being who they develop a bond of trust with. Our role is to make the experience of both parties as good as it possibly can be. Through the use of data and technology, we want to ensure that the adviser is accurate and efficient so we can maximise the value of their business.
Defaqto is already using technology in the market. We have the most popular tool that gives us access to more data than anybody else about those client interactions and the products that are being stored.
Also, advisers should take advantage of dynamics in the market.
There is pressure within equity but asset managers are also trying much harder to track themselves to advisers and advice firms. Use that to deepen relationships with asset managers. Maybe you’ve got a better deal, who knows? Asset managers should try and match up with the right advisers, where they believe their products are applicable to clients.
Why do you think it is important for advisers to embrace data and technology?
One of our aims as an organisation is to match the most complete market data along with mission critical tools. Using AI, you should be able to get to a point where, for example, you can shortlist a recommendation either at the beginning or the end of the advice process. AI can also help provide alternative recommendations, for example, that only include ESG funds, rather than using the adviser’s base recommendations.
AI provides a world of opportunity to get to the answer faster and potentially also present recommendations that the adviser wouldn’t necessarily have done themselves. This may also improve overall client outcomes.
There is a huge opportunity for the industry in being more data driven. We’re actively working on how we can use technology to further enhance efficiency within the advice process.
How will Defaqto communicate with IFA firms when it comes to implementing Consumer Duty?
Consumer Duty is the basis of what we do. The philosophy of Defaqto Engage is to provide the functionality an IFA needs to provide end-to-end financial planning process in a regulatory compliant way that delivers the best consumer outcomes.
We have added to this functionality at an accelerated rate in the past few years to ensure that the client is getting the best deal when they’re migrating their portfolios into a consolidated pot.
Contingency reviews were put together to give advisers a very clear and independent view about where investment products fit in the market. So, instead of them having to do all that comparative work themselves, we compare those investment products against various indices.
Providing independent, impartial advice is key when advisers decide what funds are appropriate for their clients.
How can the product and platform selection tool benefit financial advisers?
These tools allow advisers to consolidate portfolios together and confirm that the client is going to be at least no worse off. They will be better off from lower fees because they see the consolidation earlier, but also in terms of investment performance and one off fees. We provide confirmation to the adviser and in turn to their client that it’s a good deal for them. This information is then included within the suitability report.
So that if you have a point of file checking, if there’s any future regulatory activity, they can confirm they went through a suitable process to do that.
Consolidation and the fact the client wasn’t disadvantaged as a result of doing that is important.
For example, as people have locked in more pension pots – because typically people are having more jobs – pension legislation dictates that you have a workplace pension in most, if not all of those roles. So most likely people will find multiple pension pots and consolidation is a sensible thing to do. The product and platform selection tool targets those eventualities.
What does the recent MICAP acquisition mean for financial advisers?
MICAP specialises in the tax advantaged investment markets, so it is helpful for advisers whose clients want to invest in these products.
MICAP deals with, for instance, inheritance tax, or investing in things like Venture Capital Trusts (VCTs), Defaqto and MICAP have a parallel offering. It means we can offer more tax advantaged products rather than what Defaqto historically deals with, such as, multi assets. Also, we both have similar customer groups on either end, dealing with both investment managers and financial advisers.
As a result of our adjacencies, advisers will see an introduction of those tax advantaged products or access to those tax advantaged products through different channels. We will integrate the market offering into Engage over the next year or two.