Can robots terminate the human adviser?

Financial planners and advisers would scoff at the idea of an automated system, or a robot, providing financial advice to clients based on answers to a few questions and the click of a button.

Moreover, advisers are apprehensive of consumers embracing the do-it-yourself approach to investing, arguing that it is impossible for consumers to navigate complex investment choices and the myriad of financial products without guidance from trained advisers.

Financial planning dealer group, Wealth Today's managing director, Greg Pennells, recently labelled robo-advice a ‘cop-out', and called on the corporate regulator to ban the technology.

He said technology is useful for transactional services like buying and selling shares, stockbroking, mortgages, or even booking for travel.

"But financial planning is holistic. You almost need to have a bit of psychological skill to actually be able to sit with the client to discuss all their dreams and aspirations and then pick the right products accordingly," Pennells said.

"I know what's involved in being a financial adviser and how much training is required and how many products are out there. No one would even know where to start, and most people don't even know that they need financial planning advice."

He also worried that no one would be held accountable if a client picked a bad product as they would have chosen it themselves.

Yet, institutions and planning practices globally are beginning to offer robo-advice or digital advice as they face cost pressures and the decline in the take-up of face-to-face advice by clients.

The Royal Bank of Scotland (RBS) axed 220 face-to-face financial advisers in March, just as the UK regulator, the Financial Conduct Authority (FCA), signalled its approval of automated advice models.

In response to the declining number of clients opting for face-to-face advice, the RBS said it had introduced an "online investing platform", which would offer customers advice based on their responses to a series of questions.

Closer to home, National Australia Bank (NAB) launched its personalised digital advice offering, NAB Prosper, in September 2015, while Macquarie launched its custom online investment advice service, OwnersAdvisory, this year.

The Australian Securities and Investments Commission (ASIC) also signalled support for the automated provision of advice late last year, where chairman, Greg Medcraft, said in a speech that robo-advice could potentially decrease conflicts of interest, improve compliance, and be a low-cost financial advice option for consumers.

Robo-advice has gained increasing popularity in the US and the UK, with Betterment now the biggest independent robo-adviser in the US with US$3 billion in advice under management. In Australia, robo-advisers include Stockspot, and Ignition Wealth, which partnered with accounting and financial services practice, Stantins Consultancy earlier this month.

The 80-percenters

The fact that 80 per cent of Australians do not seek professional financial advice has been widely reported and Macquarie and NAB said this was the target of their digital advice services.

However, Macquarie Banking and Financial Services chief investment officer, and founder of OwnersAdvisory, John O'Connell, acknowledged that a section of that 80 per cent would never seek financial advice despite technological developments, and would be satisfied with seeking advice from their industry superannuation fund.

He said the bank's digital advice service was very much for the do-it-yourself investor.

"The person will already have a level of engagement with investment and then what we do is give them a second opinion that custom-fits them," he said.

This begged the question of what factors contributed to the majority of Australians not seeking professional financial advice.

The Investment Trends Financial Advice Report 2015 revealed that the real cost of advice was still four times what most consumers were willing to pay, while the gap between consumer attitudes and actual cost of advice was an opportunity for disruption.

Senior analyst, King Loong Choi, said when costs were taken into consideration, there were four times as many Australians who would opt for lower-cost scaled advice than higher-cost face-to-face comprehensive advice, while 400,000 members intended to go to their super fund for advice in the next two years.

"Furthermore, the digital channel can be leveraged, with two in three Australians open to conducting parts of the advice process online," he said.

Yet, cynics questioned whether digital advice was the panacea that would suddenly persuade disengaged Australians to seek professional advice.

Melbourne Business School principal fellow, Dr Sam Wylie, said that while the perception was that people did not seek advice due to high costs or inconvenience, it was mainly because they felt they did not require it, and they were disengaged.

"Just because you put an online solution in front of them doesn't mean that that's going to activate anything," he said.

Wylie compared this to insurance comparison websites like iSelect or Compare the Market, and said it was easier to persuade consumers to visit such websites because insurance was compulsory.

"But if you create a robo-advice product, in a way you're adding more value than iSelect or Compare the Market but you are imposing yourself between investors and product manufacturers. How are you going to acquire customers?" he asked.

Financial planning software provider Midwinter's managing director, Julian Plummer, agreed that robo-advice was not a cure-all for those not seeking advice but said it would certainly increase engagement levels when it came to dealing with those seeking out financial advice themselves.

"It may be the case that some people prefer not to see a financial planner or they would like to do it in the comfort of their own home and they'd only like to see the planner for the more complex advice pieces but yet still have a relationship with that financial planner. I think it's those sorts of people that are really going to benefit from this sort of service," Plummer said.

"It helps engage the C and D clients and allows the adviser to escalate them up to face-to-face advice when it's appropriate or when they become A and B clients."

For example, if all Plummer wanted to do was switch from a balanced investment option to a high growth option, he would prefer to have an application where he could do that himself without having to travel to see his financial planner.

Midwinter conducted a robo-advice survey of 288 advice professionals representing over 65 licensees in March last year, which found that 68 per cent of advisers viewed robo-advice as an opportunity while 32 per cent viewed it as a threat.

Roy Morgan's research on Internet banking from October 2015 found that the highest users of website Internet banking were high value customers, i.e. the top 20 per cent that controls 63 per cent of the total market value of financial services.

Plummer said if this group could do online banking over digital devices, it would not be a huge leap of faith to expect the same trend in financial advice.

Cost crunching

While the prospect of engaging more clients through robo-advice is enticing, the jury is still out on whether robo-advice firms could generate revenue and profits.

Wylie opined that because it is difficult to attract customers to robo-advice, it would be almost impossible for firms that only offered robo-advice to generate profits.

You'd think that offering an online service or in-classroom service that provided educational services to investors would generate high-volume business, but it really doesn't. It's just hard to get people to pay for those kinds of services - Sam Wylie

He also noted that robo-advice firms never disclosed their revenue and profit figures, or customer numbers, and suspected it was because the numbers were not significant yet.

"They only ever talk about growth: they say, ‘oh we're growing at about 100 per cent per year'. From what? If you start from nothing, then you can grow at 100 per cent per year forever and it will still be nothing," he said.

Wylie suggested that robo and digital advice was not unlike educational services, and could act as a "bolt-on" service that could elevate clients' discussions with an adviser.

"You'd think that offering an online service or in-classroom service that provided educational services to investors would generate high-volume business, but it really doesn't. It's just hard to get people to pay for those kinds of services," he said.

Stockspot founder and former UBS portfolio manager, Chris Brycki, did not reveal the firm's funds under management or customer numbers, and agreed that attracting customers is difficult for any technology business, and was bewildered that entrants in the business would not have known that already.

In financial services, fund managers traditionally tapped into advisers, which were the existing distribution channels to attract customers.

"In our view technology provides a great way to connect with customers without necessarily going through that channel. In order to attract customers traditionally you have to spend a lot of money marketing," Brycki said.

"To give you the example of the US equivalent of our business, they now have $2-$3 billion under management and they're still not profitable. It's clearly a business model that requires a lot of time and a lot of patience in order to become profitable."

He added that 80 per cent of Stockspot's customers were under 40, and said the firm relies on word-of-mouth from existing customers, with the firm attracting around 40 per cent of their customers through this channel.

Plummer said while advisers viewed robo-advice as an opportunity, they were not embracing it quite yet, and said it may pay itself out over the next two to three years.

He said firms that offered different types of strategies such as retirement income, estate planning, superannuation, insurance and investments through digital advice were more successful than robo-advice firms that just modelled portfolios using exchange traded funds (ETFs).

"You've got a large number of robo providers that are offering robo-advice with a siloed approach. These are tools that are not integrated into their advice process anywhere. So they have to go off and invest quite a bit of money into developing these tools and make sure they are compatible with their existing advice process," he said.

Rubik chief executive officer, Iain Dunstan, said digital channels comprised a part of the overall omni-channel strategy for institutions in Australia and in the US, and said he did not see any firm offering robo-advice in isolation, except a few specific start-ups.

"It's just part of the mix and it's just another arrow in the quiver. Institutions will need all the different advice channels, and if anything, I see it actually providing more business for planners, not less," he said.

Dunstan also believed a large percentage of clients who start out using robo-advice and digital channels might not finish that way and might transition to a financial adviser to handle their complex investment decisions.

Legal eagle

ASIC released a consultation paper on regulating digital financial product advice earlier this month, and said that while the law is technology-neutral, digital advice licensees must have at least one responsible manager who meets the training and competence standard, and who can look after the day-to-day decisions about the provision of financial product advice within a digital advice licensee.

Holley Nethercote partner, Grant Holley, said robo-advice and digital advice were the same under the law and fell into the personal advice model, but warned that robo-advice providers must account for literacy and numeracy levels of the general population when creating questions.

The questions must be simply written, clearly defined, and must take clients' best interests into account.

"That's going to be a real challenge for people who are going to design those kinds of algorithms and trying to work out what questions to ask," he said.

"I think also with some of these models there's no human adviser, you're totally dependent on the ability of the user of the technology to understand what they're reading."

He said normal rules would apply in relation to compensation arrangements if something goes awry, and said ASIC's regulatory guide 126, and the professional indemnity insurance requirements, would apply to the licensee or authorised representative that is operating the robo-advice model.

"The challenges are going to be how they meet those existing laws with these technologies. Most of the issues are going to be with the facts rather than the law," Holley said.

Holley said, however, that laws and regulations may change as a response to actual experiences over time.