In recent years, the financial planning industry has found itself in the spotlight for all the wrong reasons. Its quality of advice has been questioned but more often than not, regulations have raised costs rather than standards.
Enter robo or automated advice. The lure of low-cost cloud-based technology, powered by sophisticated algorithms, promised to slash costs and bring a high-quality advice offering to more Australians at the click of a mouse.
The reality has been far different.
Robo-advice has yet to attract a significant number of clients in Australia despite more than a dozen start-ups now active in the sector. Funds under management remain insignificant.
Notably, Westpac has just closed its fledgling BT Go-invest automated advice operation less than a year after its launch.
Despite the advantage of a huge customer base, Westpac cited unsustainable fees (50 basis points) and significant investment requirements on a product with low funds under management (some customers have been rolled into a similar offering charging 70 basis points).
Developments in the US, where the automated advice industry is more established, are even more revealing. Automated adviser Betterment, which has more than $US5 billion in funds under management, substantially raised its fees in February and, for the first time, introduced a separate face-to-face financial planning service.
Many other major US automated advice offerings are already on this ‘bionic’ or ‘cyborg’ path including established firms such as Vanguard and Charles Schwab.
What we’re seeing is a fundamental shift that acknowledges what traditional advisers have always known: people need a trusted financial adviser to put them on a path to financial wellbeing and keep them on it.
The complex path to financial wellbeing
There is no doubt that fintech has slashed the cost of providing a range of investment services to the mass market. However, the individuals that comprise the mass market don’t typically make complex financial decisions with minimal guidance.
Most robo-advisers currently offer a simplistic risk profiling questionnaire and then funnel clients into a portfolio comprised of exchange-traded funds. This is advice at its most basic. It can’t possibly meet the holistic needs of people who are often swayed more by their own attitudes, motivations and personal biases, than their own financial knowledge and skills.
The fiction that people are rational economic agents has been revealed as highly flawed.
The Wallis Report in 1996-97 revealed the strengths of product and advice disclosure but it took almost another two decades before the Financial Services Inquiry acknowledged the impact of faulty thinking. Product issuers and distributors are now being asked to take greater responsibility to ensure that their products meet the needs of targeted consumers.
This is an important development but ultimately, a good financial planner knows that appropriate products form just one small component of holistic goals-based advice. It takes an ongoing relationship that encompasses education, encouragement, communication and empathy.
This type of effective financial coaching takes trust which is built over time.
The natural role of technology
Technology is ultimately an enabler, not a replacer of people. Robo-advice won’t take clients away from traditional advisers – it will bring them in the door by lowering the cost of advice.
Those efficiencies will play out in various ways. It will lower the cost of some traditional advice activities and lessen the regulatory burden.
A recent Morgan Stanley report (Robo-advice: Fintechs enabling incumbent win) estimated that new automated advice technology could lower established adviser costs by 10-20 per cent.
More excitingly, fintech will also open up revenue opportunities with new lines of advice that were previously uneconomic to offer. This will also allow advisers to expand on their trusted relationship to meet the changing needs of clients over time.
This is something advisers are now embracing. When asked how automated advice tools can benefit their business, financial planners said it will enable them to focus on providing strategic advice (53 per cent), service more clients (43 per cent) and lower the cost of advice (41 per cent), according to a recent Investment Trends survey.
The evolution of automated advice tools is only just getting underway. It hasn’t played out as many expected – significant technological innovations rarely do – but it will change the nature of traditional advice for the better, for clients and planners alike.