So-called ‘robo-advice’ is advancing from the poor and derided cousin of 'real' financial advice, into technological wizardry set to change the way consumers receive money and investment advice.
Automated advice started out simple with easy tools to make figuring out how much insurance and superannuation you might need easy. Now, advanced algorithms, skip logic, and the ability to really quantify certain situations people find themselves in financially means what used to be a basic tool can now be turned into a complex product, and in some cases, combined with a service element. There are so many ways automated advice can make our lives better, simpler and cheaper.
The people making the software tend not to be the same ones who are providing the financial advice – this software needs to be created by well-equipped IT companies, a few of which provide financial planning software and other tools – nothing new there - but it means there is a gap between those with the means and those without. Creating complex code is no walk in the park for your average financial adviser. Therefore, it costs.
This creates a divide between advisers and software companies regarding this type of advice, since it seems to directly conflict with the standard advisory platform.
Or does it?
There is evidence to suggest that the consumers who want automated advice online wouldn’t be going to a financial adviser anyway – these are younger, more tech-savvy creatures who find no good reason to see anyone face-to-face unless they really must.
These people grew up with online shopping being par for the course. They don’t understand why we say we dial a phone number, struggle to read cursive, and have never had to wait to get a photo developed. They do not want to talk to a financial adviser – they know how to find information because it’s easy – it’s on the internet. They have discovered a level of trust in technology that most other people don't have.
This means that at financial services (tortoise) speed, there still remains a huge untapped market for automated variants of financial advice completely online. There is nothing stopping this automatic service from delving into the realm of the ‘real’ adviser when things get complicated and past the scope of automated advice. It actually won’t conflict too much – at least for a while – with in-person financial advice and can be used as an adjunct. In fact, it can be used in a thousand ways we don't understand yet.
The trend overseas is for companies to develop systems whereby consumers can design their own financial plan, choose their investments and set up their portfolio, including executing trades, with very little or no human assistance. This reduces a lot of the costs involved in the typically fee-heavy financial and investment advice circle. This is appealing for many, with the attitude being I could do better myself so why am I paying them so much for this?
There are billions in automated advice
An article published in late 2014 by WealthBriefing estimated that global assets by automated advice services were to hit US14 billion by the end of 2014 – as we approach the end of 2015, this figure has obviously increased, with estimates of US$225 billion being managed via these platforms by 2020.
Most of the automated advice companies are currently based in the United States managing US funds, leaving Australian companies behind. This is partially due to a slow-acting, low-innovation environment, but while a much smaller population means less innovation, that is no excuse – automated advice is a practical solution to a developing need and in fact Australia could do with a bit of that right now, particularly in the financial advisory space.
The Australian public still doesn’t like financial advisers a great deal, despite many exhibiting clear symptoms of financial advisory deficiency, so having some new, well-thought-out online solutions solves a problem nobody knew they had.
We trust certain parts of the internet (maybe foolishly), more so than we tend to trust financial advisers – stuff is set in stone, and with proper regulations and monitoring, there isn’t room for getting fleeced. This matters, and it cuts out one of the icky parts of the financial advice industry in Australia, and gives people what they need and want – financial advice, limited as it may be.
Young people aren't as ignorant or disinterested as you all make out
Younger people without the minimum funds required to make it worth engaging an actual adviser want and need help too, and young people are earning more than ever, having children later, and building more wealth – modest or otherwise – than ever before. There is a whole generation of single-ish people with education and money (and often hefty inheritances) in their 20s and 30s who are interested in investing, but nobody appears that interested in helping them, so they are usually just figuring it out on their own, following their nose.
Many people just don't want to pay adviser fees at all
Then, there are the people who – without commissions – can’t or don’t want to afford to pay in a lump sum for advice. This is ‘lost’ clientele for advisers but a potential boon for automated advice platforms, which are typically less costly than real human advice. This is where a company with a split profile can keep its customers, but transition these customers to their automated platform so both parties still get what they want.
There isn’t any real reason why software can’t become so complex that it can find – with the right inputs – the best solutions for a client at at least the same level as a financial adviser for a regular investment profile - people's lives aren't really that unique that a few shoes can't more or less fit everyone, or that the software can't have a set of guidelines based on IF scenarios. It's binary. Black and white.
There are rules in financial services, and these rules can be turned into code. We can also use automated advice to personalise our experience.
Costs may even increase for some newer automated platforms as the offering increases in sophistication and value, doing things faster and better than an adviser could. Automated advice will soon enough be integrated with various other platforms and services so it then becomes a seamless offering that includes both human and auto functionality, which varies depending on need, desired level of intervention, and personal financial goals.
It can also go further. Imagine personalising your portfolio based on data you didn't have to hunt out - if you had personal preferences for investments (like the tough one of no animal cruelty, for example), you could easily set your preferences to exclude this. Someone else does the heavy lifting and uploads the data and writes code. This also allows consumers to really guide their investments in a way that makes sense to them, supporting their personal values.
This can come with comparisons between performance of certain stocks historically so the person is very clear about what this choice entails. It could mean a slight drop in performance that they are willing to live with. This makes investing really personal, which in really should be - what we put our money into is essentially running our planet. We have to remember that.
There is currently no set model for how automated advice works, but that will likely appear as the number of providers and regulation increases. There is also no reason at all why investing can't be more accessible to more people - everything is online, traceable, and automatic anyway, so what difference will it make?
Is this the end of financial planning as we know it?
The end of financial advice as we know it has already occurred with the global financial crisis. The advice industry in Australia has had a very stern lecture and its toys taken off it, with the party being well and truly over. Automated advice rolling into town in a ragtop has been seen as a threat by some, and an opportunity to others. It appears to truly be both, depending on who you are.
Automated advice is one element of the future of financial advice that is here to stay, and a welcome change for many in an industry fraught with self-interest. Older or more traditionally-minded advisers are exiting the industry after the FoFA changes, and younger, more IT-comfortable advisers are stepping into senior roles, starting their own businesses, and innovating without barriers. That is, advisers who adapt will embrace automated advice in their practices and make the most of it, either by developing their own apps or using other developers’ apps.
The future of financial advice is well on its way.