The increasing attention in Australia to technology-driven financial advice, dubbed robo-advice, raises numerous questions for investors, super funds, fund managers and financial advisers.
What is robo-advice?
Robo-advice, commonly referred to as digital advice and automated advice, is built on a foundation of rules and algorithms using client data to drive automated advice recommendations.
In broad terms, a calculation engine or platform will power a robo-advice tool. These engines and platforms house the rules and algorithms which consider variables such as scenario (singles/couples), age, gender, assets (superannuation and personal investments), income, debt, financial objectives and tolerance to investment risk. Risk has traditionally been described in terms of a person’s aversion to capital losses (that is, market volatility). More recently, it has moved towards the probability of achieving a targeted objective, such as the level of income in retirement.
The actuarial sign-off of these engines and platforms is an important component of the comfort and security that users will seek when relying on recommendations from advice technology. In particular, providers of advice technology solutions will want to ensure, and certify, that their advice solutions are accurate and compliant.
It is relatively early days for advice technology, with solutions only scratching the surface on a range of advice topics and strategies, including adequacy of retirement income, adequacy of insurance, transition to retirement, contributions optimisation, debt, investment and client profiling. Advice needs to be provided for couples and this requires data often not held.
The advice tools can support a self-directed or guided experience and can be delivered across multiple channels including a desktop computer, tablet or smartphone. Currently, advice being provided by robo-tools is relatively basic but will become more sophisticated as the environment matures.
Ideally, robo-advice technology will reduce the cost of advice, make advice more accessible, and improve the consistency of advice. Ultimately, these developments will assist in the education of members, resulting in enhanced levels of financial literacy and member engagement.
How is robo-advice likely to evolve in Australia?
Based on overseas experience, it seems that “personal” robo-advice (as distinct from “general” advice) will generally fall into one of the following categories:
- Fully-automated advice with no human inter-action.
- Hybrid services that start with fully-automated advice, with various levels of sophistication, supplemented with the option of consulting a “human” adviser.
- Full-service traditional advisory services that leverage guided advice technology solutions. This model is a logical development of existing full-advice services typically aimed at wealthier clients with more complex issues.
Technology developments allow the delivery of scalable on-line advice tools to a large audience in a cost efficient manner. Properly utilised, robo-advice will allow providers of advice to extend their value proposition to target those investors who historically have not had sufficient assets to meet the current business models. This will likely include many younger investors.
Further, the arrival of robo-advice may enable traditional advisers to concentrate more on their roles as behavioural coaches, urging investors to adhere to their long-term objectives and not to allow emotion to dictate investment decisions.
Source: Rice Warner
