The world of so-called robo-advice can seem a strange and bewildering space. There are almost as many definitions of the term as there are robo-start-ups; and there seem to be as many predictions of the likely impact of robo-advice services as there are services themselves.
Thankfully, some order is beginning to emerge from the maelstrom, and some clarity around a possible longer-term form and function for robo-advisers – or automated advice services or bionic advice service, as some call them, reflecting the concept of the machine augmenting the human.
As clarity starts to emerge, the threats and the opportunities of robo-advisers also become clearer. The humans most at risk are those whose value proposition focuses most keenly on investing.
Some robos clearly are not providing advice at all. It’s hard to see the advice in a service that asks an individual to answer half a dozen questions about risk and then plonks them into a pre-determined portfolio of exchange-traded funds. That’s an investment service, pure and simple. But robos can do it effectively and efficiently, and if you find yourself competing against a robo to do this, you’re doomed.
As robos become more sophisticated, even less simple advice is at risk. Financial planners whose value proposition sits a bit further up the value chain are not immune from the rise of the machines – robo offerings are evolving quickly and becoming increasingly sophisticated. They are already poised to start providing simple advice, calculating, for example, whether an individual’s available funds could be better used to increase super contributions or pay off debt – and even transition-to-retirement (TTR) strategies are on the verge of being automated.
And behind the scenes, major institutions are plotting how to offer robo-advice as part of multi-channel advice strategies – in a similar way to how banks offer access to essentially the same underlying service online, through ATMs and over the counter.
Perhaps more intriguingly, some of the organisations contemplating robo-advice strategies are not financial institutions at all, in the traditional sense. But they do have a trusted brand and a large customer or membership base.
The folly of an investment-based proposition
The folly of an investment-based value proposition is an issue that Professional Planner has written about before, albeit for other reasons. It also ties in to this publication’s view that asset-based fees represent conflicted remuneration and have no place in a profession.
Investing is, in some respects, a low value-adding activity. Both Morningstar and Vanguard Investments have dissected the total value, or alpha, added by financial planners to client portfolios, and most of it does not come from investing. It comes more from asset allocation, structuring, tax efficiency and so forth. In other words, more value comes from planning than comes from investing.
Morningstar has estimated that an individual who seeks financial planning advice (and then not only takes it but sticks to it) can end up with 23 per cent more in retirement savings than an individual who does not seek help. And this analysis only looked at five specific strategic things out of all the things financial planners routinely do. Morningstar refers the the value added by advisers as “gamma”
Morningstar estimates that to add the same value just by picking stocks, managed funds or ETFs, an adviser would have to generate an excess return of 1.5 per cent a year, every year, for 30 years.
Vanguard, meanwhile, estimates that a lot of value is added by advisers who simply stop their clients from making unwise decisions, and could be worth as much as three percentage points a year to a client’s total return. It calls this “adviser’s alpha”.
Moving away from the traditional
Vanguard says this kind of advice requires planners to move away from a traditional focus on outperformance, picking winners, security or manager selection and timing markets.
In fact, it requires advisers to do all the things that robo-advisers are so far unable to do, including a move towards providing tailored asset allocation, sound portfolio construction, behavioural coaching and holistic planning.
A recent survey by IOOF found that 76 per cent of financial planners’ clients rated “achieving core goals and lifestyle objectives” as “the definition of a successful ongoing financial planning experience”, and just 14 per cent said they rated “better than average investment performance” as the benchmark.
So if the relatively low-value activities are being taken over by robots anyway, and the things that advisers do that genuinely add value (and which clients really want) are further along the “value spectrum” than simple investing, then on multiple counts the days of the investment-oriented value proposition are numbered, if not already over.
Being paid for providing low-value or endangered activities makes no sense, either. Asset-based fees are linked to the investing part of a proposition; and apart from the inherent conflicts, if you’re competing on price against a robot then you stand no chance.
And if your argument is that what your clients actually value is all the other stuff that you do apart from investment, then those are the things you should be paid for. It’s not just common sense, it is also a far more sustainable basis for remuneration.
