For reasons that don’t bear going into, Professional Planner spent the better part of seven hours one day last week riding on a Greyhound coach from Sydney to Canberra and back. The glamour of the media.
One of the upsides of this mode of transport is time to think and read. A lot of material published recently focuses on the rise and rise of robo-advice. But a lot of it seems, upon reflection, to miss a couple of crucial points.
The biggest issue emerging from the so-called robo-advice revolution is not how it will enable the financial planning industry’s incumbents to serve clients better, because it will – even though it will really only drive more of the same, albeit at a potentially lower cost.
A bigger issue is which organisations will be empowered and emboldened by digital disruption to wade into the financial planning space and turn the sector on its head. There could be plenty of those. And the organisations that the industry’s incumbents should be most concerned about are the ones they can’t currently see.
And a related issue is how much money will be burned by robo start-ups and how much money investors in those start-ups will lose trying to get systems and services up and running before they simply get steamrollered.
Fundamentals being questioned
But even robo-advice’s fundamental modus operandi is now being questioned. A co-founder of risk profiling firm Finametrica, Paul Resnik, says there is real danger in simply linking an individual’s risk tolerance directly to a model portfolio (and here he explains why).
It takes a few things to create a simple or even a moderately sophisticated investment-based value proposition (for that is what robo-advice is). First of all, you need a consumer, of course. There’s no shortage of organisations that have enormous customer bases and very strong brands.
You need to have a bit of a sense of the financial profile of those customers, too. Again, there’s no shortage of organisations that track their customers’ activities closely, and can build detailed profiles of them when they spend money and how much they spend.
You need to know a little about the personal circumstances of the customer – are they at or nearing a trigger point in their lives where financial advice makes sense to them?
From pet insurance to life insurance to …
The purpose of any loyalty program is to link sales and consumption data to individuals to identify behaviours and preferences. It has developed from an art into a science, and it’s certainly not new. It’s more than 20 years now since a visiting executive from the UK supermarket chain Tesco explained one of the ways that company had started to mine customer data. He described how tracking the goods that customers included in their baskets had given the retailer insights into what was happening in their lives. Back then they were using what they learned for laughably modest purposes: if someone suddenly started buying dog food, for example, Tesco would send them a brochure on pet insurance. If they bought nappies one day, they then could start to talk to them about life insurance.
Add in the burgeoning ability to track consumers by other means – phones, online browsing habits – and there’s almost nothing a smart organisation doesn’t know about its customers, or can’t flesh out by sourcing data from other providers.
A large number of very significant organisations that do these things as a matter of course simply do not exist within the “financial services” industry as we currently understand or define it.
A quiet word of thanks?
Maybe at this point it’s worth stopping and whispering a quiet “thank you” for the Future of Financial Advice (FoFA) rules, and the proposed changes to lift the professional, ethical and education standards of financial planners. Despite – or perhaps because of – the disruption it has caused, it has cemented the fact that the human element is absolutely at the centre of the financial planning process.
Anything that does not or cannot involve humans is, by definition, a fringe activity. It might become a very large activity, in dollar terms, but it’s absolutely not the whole thing.
All robo-advice seems to do, as we see more of these services emerging, is try to gauge an individual’s risk tolerance, and then put forward a prefabricated (that is to say, model) portfolio. That’s all it can do, because to do more crosses into the realm of personal advice and then that whole pesky FoFA, higher standards, need-to-be-a-human thing comes into play.
There are other warnings worth heeding, too, and not only by financial planners and institutions themselves.
Low barriers to entry
A venture capitalist of Professional Planner’s acquaintance is adamant that he would never commit capital to a fintech start-up. He argues that the barriers to entry are far too low, and the proof of that is already obvious in the sheer number of start-ups he’s already being asked to look at and that every man and his cloud-based application is into it.
He says first-mover advantage is fleeting, because nothing created today can’t be replicated tomorrow or, at best, the day after. New technology is emerging so quickly that today’s start-up is tomorrow’s dinosaur.
And finally, he says that unless they have every single one of the other links in the advice chain – customers, insight into behaviour and buying habits, access to trigger points – already joined up and integrated, they’ll be competing with organisations that are bigger, better resourced and already far closer to large numbers of customers than a fintech start-up will ever be.
A bus trip to Canberra and back afforded the time and the space to ruminate on this, and other issues. The impact of technology shouldn’t be underestimated, but nor should it be assumed. Ironically, on the return leg of the trip the coach’s wifi broke down.
