Consumer robos vs enterprise digital advice: two different playing fields

Robo-advice startups are receiving considerable attention from the media, government, and the industry but there is a vast difference between consumer-focused robo-advisers and the challenges that financial services enterprises are striving to overcome, Nic Pollock writes.

Federal Treasurer Scott Morrison recently endorsed robo-advice as a vital next step in the evolution of Australia's financial sector.

Speaking at a G20 conference in Germany, Morrison said he planned to encourage more robo-adviser startups to launch in Australia, a move he believes will enhance opportunities for financial services providers, including superannuation funds, insurers and banks.

But his comments are consistent with the broad lack of understanding that exists globally of the power of digital financial advice and the requirements such technology can address for major financial institutions.

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The term ‘robo-advice' has come to be associated with consumer-focused online tools geared towards managing investments.

It is one of the recent darlings of the fintech startup world and aimed primarily to disrupt traditional financial advice services. In other words, robo-advice presents a direct challenge to established traditional brands and adviser roles.

The driver in recent years for more robo startups to enter the market has been the promise of a large, untapped market. It is broadly accepted that only 20 per cent of the Australian population utilises financial advisers — and typically that is the wealthiest 20 per cent of the population seeking to enhance investment opportunities.

The remaining 80 per cent of the population is perceived as the golden goose. But it has taken the industry time to understand that replacing human wealth management services with online alternatives is still addressing wealth management — and hence the same 20 per cent of the population with accessible cash to invest.

There's no denying that consumer buying habits have changed.

On average, given 70 per cent of buying decisions are now self-directed, and with an ever-increasing appetite for anywhere, anytime access to everything, consumer-focused robo-advice has its place.

But it's simply a case of out with the old, in with the new. And it leaves that 80 per cent of the untapped market still untapped.

The inevitable result will be that as more robo-advisers compete for existing market share, fees are driven down in an accelerated race to the bottom, and they will be competing for that market share directly with established brands offering other forms of wealth management advice including human-based services.

The real golden goose has always been to address the issue of providing highly tailored advice to a far greater number of individuals.

In other words, the democratisation of financial advice making financial advice relevant and available to the 80 per cent.

But there's a major resource overhead in doing so. That is why, without adequate technology to assist, financial institutions have historically had no option but to focus on investment advice for the wealthier 20 per cent of the market. It is the low-hanging fruit that has yielded the greatest return on investment.

However, in a world where customer retention is an ever-increasing challenge, banks, superannuation funds, and other financial institutions must evolve to remain profitable.

It requires far more than managing investments. According to 2015 research by US-based market researcher Mintel, a key driver of customer loyalty for banks is offering assistance to manage debt.

To do so, it is not just a case of refinancing loans, but of gaining a holistic view of a customer's income, expenditure and investments, and offering tailored advice with the potential for tangible long-term benefits. And doing so without requiring significant input and expense from customers.

That requires comprehensive integration to other business systems and ease of access to all financial data for a customer. It's more complex than offering standalone online tools that, in many cases, are little more than calculators with fancy front-ends.

The underlying technology of a comprehensive digital advice solution must be capable of integrating into an enterprise's existing and planned infrastructure, ingesting data from multiple sources, and processing it in a meaningful way to produce precise results.

Unlike robo-advisers, offerings targeted at established enterprises aim to add value to existing services, not replace them. And that comes with a whole set of challenges.

While algorithms have advanced significantly in recent years to cater for a multitude of ever-changing scenarios, there are still situations requiring customers to be triaged.

While one individual's circumstances may allow a start-to-end online journey, from gathering relevant information to executing the advice offered, the combination of factors for other individuals may necessitate a phone consultation or sit-down meeting.

So as well as being able to gather, calculate and deliver advice, enterprise solutions serve as traffic controllers in order to deliver consistency of service and advice.

Increasing the reach of financial services also increases the underlying risk. So compliance becomes a core requirement.

It is the reason that the Australian Securities and Investments Commission (ASIC) weighed in to ensure that as the digital advice revolution unfolded, adequate controls were put in place.

The resulting Regulatory Guide 255, issued last year, was a plus for the industry.

While it is initially a set of guidelines, it was a very important milestone in the industry and many financial institutions looking at digital advice offerings have turned to RG 255 to guide their decisions on appropriate solutions.

The result is that those startups that did not consider compliance from the outset have been placed on notice — go back to the drawing board or find bolt-on compliance management solutions to meet the requirements of RG255.

Consumer-focused robo-advice may have started a revolution. But enterprise digital advice is core to the financial sector's ongoing evolution.

Nic Pollock is the chief executive of enterprise digital advice provider at Decimal.