Is Technology Opening More Doors to Financial Advice?

As we mark the 10th anniversary of Morningstar magazine and take stock of where we are as investors, I wanted to look at how the nature of personal finance has changed. Just 10 years ago, HelloWallet had not yet been founded, Steve Jobs was still readying the first-generation iPhone, and banking tasks that we do online today often required a trip to the local branch.

Given how rapidly technology has evolved over the past decade, has the nature of receiving financial advice changed alongside it? Has financial technology started to fulfill its promise of democratizing access to sound financial advice? I rely on the Federal Reserve's most recent Survey of Consumer Finances, as well the edition preceding it by nine years, to explore these issues.

Changing Nature of Advice It is difficult to quantify the extent to which different data sources of advice lead to better outcomes using government survey data. But we can gain insights into the changing nature of advice by observing the share of people seeking different kinds of advice and by examining the demographics of people seeking that advice.

The Internet permeates our daily lives—75% of people in the United States are Internet users, according to the World Bank—and people increasingly rely on web-based applications to hire taxis, order takeout, and generate movie recommendations. It’s reasonable that people also are turning to the web for personal finance guidance.

In the past 10 years, the share of households using the Internet and online services as resources when making financial planning and savings decisions has increased to 35% of households today from 19% back then. So, more people are using these services, but have they democratized access to personal finance advice?

The average age of a household seeking advice from online services increased to 46 from 42, which makes sense; back then, young, tech-savvy early adopters likely dragged down the average.

One might expect that as access is expanded to those who might not otherwise receive personal finance advice, the average income of those seeking advice online would decrease. However, the average income of households actually increased to $112,000 from $105,000. This may not fit everyone’s idea of democratizing access. However, we can say that fintech’s role as a valuable resource in planning, saving, and investing has grown significantly.

Traditional Planners Gain Interestingly, the reliance on traditional financial planners increased modestly, to 26% of households from 19%. This should allay fears that traditional planners might soon be obsolete. Indeed, personal finance applications can complement traditional planners, enabling them to serve more clients by boosting productivity and enhancing the quality of their advice by giving them a more complete view of their clients' finances.

Friends and family remain the most-used source of advice for saving and investing decisions. Despite proliferating technology, and a modest increase in the reliance on financial planners, the share of households responding that they used friends and family as a resource increased to 40% from 34%.

Peoples’ financial lives are becoming increasingly complex, as well, and online account-aggregation services are particularly useful in turning fragmented retirement accounts and credit cards into a whole financial picture. Today, the average household has more than six accounts to track. However, the share of households using software to help manage their money remained within the margin of error, at 19.6%.

For all its promise, it appears fintech has gained only a modest amount of traction in the advice space and has a way to go in terms of expanding access across the age and income spectrum. This isn’t to say that the logic underpinning it is flawed, or democratizing access to financial advice with technology is not worth pursuing. And this analysis only looks at the sources of advice, not the quality of advice. Large-scale transformations, particularly those revolving around personal finances, don’t happen overnight, and behavior changes take both time and effort to establish.

This article originally appeared in the June/July 2017 issue of Morningstar magazine.