Whether it’s a friend or foe of financial planners, robo-advice is coming


August 13, 2015

Robo-advice looms large on the radar of the Australian Securities and Investments Commission (ASIC), according to Louise Macaulay, a senior executive of the regulator’s financial advice team.

The term robo-advice refers specifically to automated financial advice delivered without the involvement of a human adviser, usually through the use of complex algorithms.

However, in Australia, the term often also refers to other forms of computer- and technology-mediated financial advice that includes the involvement of a real-life adviser – such as online web chat.

To better understand the potential consumer benefits of robo-advice, along with the possible threats, in April this year, ASIC formed an internal working group and innovation hub.

“We see that new technology is creating new opportunities and of course, new risks, in financial services and markets. We want to encourage that innovation, where it’s got the potential to benefit consumers,” Macaulay told attendees at last week’s Advice in Super Symposium in Melbourne.

“As regulators, we want to ensure that when these new products are being developed, that there’s regulation that is appropriate, effective and that promotes investor and consumer trust and confidence,” she said.

Key considerations ASIC is mindful of in relation to robo-advice providers include:

– Is it appropriately scaled? How do robo-advice providers comply with best interest provisions in a situation where their advice offering is very narrow?

– How do these advice providers develop and test their algorithms?

– What are the training and competency requirements for those who are behind their development and maintenance?

– What is the adequacy of their compensation arrangements? What happens to risk in these scenarios?

ASIC innovation hub

This provides detailed information for financial technology start-up businesses, along with informal assistance, such as help in applying for appropriate licenses. The work of this hub extends to digital advice businesses.

The regulator also has a digital finance advisory committee, which provides insight to ASIC from industry, much like its consumer advisory panel gives a means for consumer representatives to connect.

“We’ve been quite active in searching out entities that are providing these kinds of services, and we’ve found they are happy to meet with us, and we’re still in the process of meeting with many of them,” Macaulay says.

Many of these are existing advice providers, but the Australian financial services market is also seeing some new entrants in this specific area digital and robo-advice.

As Macaulay says, “We’re seeing a variety of models, but the main emphasis has been on heavily scaled investment advice.”

“We’ve also seen some third party advice platforms, which [Australian Financial Services] licensees will pay to use and then tailor. But we haven’t yet seen an automated full advice delivery model.”

While certain areas of the financial planning industry have viewed robo-advice as a threat to quality advice, Macaulay highlights some of its potential benefits.

“We think it has the potential to provide convenient low-cost advice to consumers…[and] the potential for improved compliance and record keeping and even a possibility of a reduction in the conflicts of interest that arise when you have that human element in the provision of advice.

“The same rules and obligations for the giving of advice apply to digital advice. We see the legislation as technology neutral in the obligations it imposes in this area,” Macaulay says.

ASIC’s research into the provision of robo-advice in its more pure form has encompassed a number of other markets where it is more advanced, including the United States, Belgium and the Netherlands.

The US experience

United States-based global consulting firm A.T. Kearney has conducted a detailed study into the level of uptake and consumer appetite for robo-advice. It surveyed 4,000 US banking consumers in May this year, and concludes robo-advice in its pure sense will become mainstream in the US within three to five years.

“It’s our sense that this is really going to happen, this is not just hype,” Bob Hedges, partner, A.T. Kearney told Professional Planner during a visit from the US this week.

He has been meeting with senior figures from Australia’s top four banks and AMP, along with financial technology companies, and interest in robo-advice is high.

The study suggests the amount of assets invested through these platforms will grow more than ten-fold by 2020, and will account for 5.6 per cent of the total pool – from its current level of just 0.5 per cent.

This translates to around $2 trillion of US assets under management by 2020.

Instead of posing a threat to traditional planners by cannibalising their client bases, the research suggests the uptake of robo-advice will be more pronounced among self-directed investors.

“A lot of the early adopters are all going to come out of those self-directed platforms [such as Schwab, Vanguard, FutureAdvisor and Wealthfront],” Hedges says.

Just how closely Australian consumers’ appetite for robo-advice correlates with the US experience should become clearer next month, when A.T. Kearney releases the results of a similar study conducted down under.

TOPICS:  A.T. KearneyAMPAustralian Securities and Investment Commission (ASIC)robo-adviceSchwabvanguard