The coming of age of robo-advice

The term ‘robo-advice’ was once the hot new thing set to disrupt the industry. Fast forward a few years and the financial advice industry has been distracted with constant regulation change, a Royal Commission, and now the COVID-19 pandemic. So where does that leave robo-advice?

Once touted as the “biggest disrupter” the industry would face, it seems to have stagnated over the years in Australia. 

Financial Planning Association head of policy, strategy, and innovation, Benjamin Marshan, told Money Management that the sluggish development of robo-advice was due to the fact that in the past it had not been a particularly good experience for clients.

“[Robo-advice] was a buzzword and it didn’t really work very well. In a lot of instances there was friction between using the tool and getting money on a regular basis was quite clunky and difficult,” he said.

“It was a novelty and didn’t solve problems for clients well and was not particularly exciting so that novelty kind of wore off quite quickly.”

Marshan noted that from a planner perspective, planners did not know where or how it worked and so did not use the technology much.

Quantifeed senior executive strategic partnership, Graeme Brant, said the lack of activity came down largely to the changes in wealth management following the Royal Commission such as large financial institutions exiting the market and many advisers leaving the industry.

“We’re in a constant state of regulatory change in the Australian market and I think many people were thinking ‘well, let’s try and have this regulatory change slow down a little before I embark upon something’ and then get their head around the regulatory requirements for robo-investing,” he said.

However, despite this “timing issue” Brant noted that there were misconceptions early on that robo-advice would beat the market and this would have disappointed people. He said robo-advice was about bringing efficiency and scalability rather than beating markets. 

Investment Trends research director, Recep Peker, said awareness was an issue with the lack of take up and that branding was a key catalyst to drive the technology into the mainstream. He noted robo-advice was widely used in the US and that US firms had spent a lot of time and resources educating and advertising to the market. 

“If you give them a prompt and ask them about Raiz, Stockspot, Spaceship Voyager, etc. half of online investors have not heard of any of the brands. These are also people who are actually engaged with investments,” he said.

“That indicates that part of it is awareness of these things. The reality is that once people are aware then they start to see reasons to start using them. The top thing they say is ‘it’s a good way to start investing, it’s cost effective, and I can get diversification from these service providers’.”

THE ROBO WAY

Despite the timing issue Marshan said there would always be things distracting businesses away from modernising and adapting to future opportunities and advisers needed to think about where they would be in five years’ time.

He noted that, at the moment, most of the robo-advice technology were “blunt tools” that looked at risk profiling and then categorised clients into blunt investment solutions such as balanced, growth or conservative funds with “not a lot of sophistication” beyond that.

However, Marshan said platform architecture was becoming more open and this meant that algorithmic solutions were being built into the platform along with platforms making better use of knowledge and experience from investment managers.

He said robo-technology was also getting better at the ability to plug in better fact finding, risk profiling, risk capacity, and goal-based type algorithmic questions into the solutions.

“You’ll see much more sophisticated solutions that are better catered to clients and the technology will become more attractive to planners and consumers when they get away from just a balanced, growth or conservative fund outcome,” he said.

“It will look a lot better in five years time and it will have more attractive propositions in a more cost effective and efficient way.”

He said there was a big opportunity for planners to think about how to best serve their clients.

Robo could help clients that needed education and support for more simple investment solutions to help them get onto the right track, he said.

“If they can afford to invest a little bit on a regular basis then robo-advice tools can help with that through dashboards and data feeds,” Marshan said.

“They can start to help a person on their journey from learning about their financial positions and setting simple goals, to help them become a client that can pay for a holistic advice process which unfortunately with regulatory costs is out of reach for most Australians.”

Aberdeen Standard Investments (ASI) head of retirement and product strategy, Jason Nyilas, said using robo-advice or ‘bionic’ advice would allow advisers to see more clients using less hours with more value added which made their businesses more profitable. 

ASI managing director, Brett Jollie, said the cost of being an adviser was going up as advisers were required to end grandfathered commissions to a fee-for-service model, and they were burdened with ever increasing regulatory and compliance costs with some having to study again to complete the Financial Adviser Standards and Ethics Authority (FASEA) educational requirements. 

“The cost that goes into full service clients is only increasing not decreasing. Advisers need to find ways to improve efficiencies, and it’s not feasible to just lower fees to be competitive. They need to change the way they operate,” Jollie said.

“A large number of smaller clients are being dropped as financial advisers don’t have the capacity to service the number of clients they could have under a commission based structure. One of the biggest challenges in a fee-for-service model is being able to continue to provide affordable advice.

“One of the solutions, and just about the only solution, is to adopt the digital advice, robo-advice, or bionic advice. They need to build efficiencies through technology and look at other areas like outsourcing investment management.”

Brant said some advisers became “very keen” on robo-advice when they understood the efficiency benefits. However, there were advisers on the other end of the scale who

“still felt threatened by technology” as they had established worked practices they did not want to change.

“But increasingly there’s a realisation that financial advisers need to make their businesses more efficient, and that has come from the Royal Commission, increased regulatory oversight, and the fact that professional indemnity insurance has gone up, and thus the cost of the business,” he said.

“I think it comes down to making sure that there’s growth. They’ve got an avenue for growth and often that is having a pipeline of customer that could move from a digital relationship to one of full service as their needs become complicated over time.”

Peker said the biggest opportunity robo brought was reducing the cost of advice and being able to provide affordable advice to those that needed it.

“Advisers don’t just want to service high net worth clients and the mass affluent. Robo-advice tools that help with investment selection can be quite powerful to save advisers time,” he said.

“Our research found the average planner that used managed accounts to outsource their investment process into that structure saved 13 hours per week for portfolio management tasks. 

“What robo-advice can enable planners to do is service a segment of the market which isn’t getting advice at the moment with little or no paraplanning.”

Ultimately, Jollie said, it would be the clients and the advisers that would benefit from robo-advice.

“It’s about improving efficiencies – advisers will be able to able to service more clients, they are able to create more customised solutions, and ultimately provide a better solution and bring down costs,” he said. 

“From an adviser perspective there are certainly significant benefits here and we’re not crowding out the advisers. They continue to play a very important role in this process. 

“Ultimately the clients, whether they are accumulation or decumulation because retirement will increasingly play an important part of the market for everyone, will be better off for this.”

WHAT TO LOOK FOR IN A ROBO PARTNER

For advisers looking into bringing robo-advice into their offering, Brant said advisers needed to first think about the customer segment they were seeking to service and what their needs were to make sure the robo capabilities aligned with their needs.

Brant said customisable solutions were useful as the needs of one adviser group was different from another and having the breadth of capability to customise would be able to help address the needs of their clients better.

He said it was important to workshop with prospective partners to help them understand what it was you were trying to achieve “rather than having robo as a fashionable thing”. 

The first thing Marshan said advisers needed to do was partner with a robo provider that had the same investment philosophy, style of investing, and way of thinking about advice.

“Then you’ve got to have the advice process mapped out, tech stack mapped out, and you’ve got to have a funnel for how you move clients from finding out about you into these robo solutions and then back out of the robo solutions when you’ve graduated them into other advice offerings,” he said. 

“You can’t just snap your fingers and think it’s going to work for you you’ve got to plan it out and think about how it will work.”

However, Brant warned that advisers needed to be wary of robo solutions that were too complicated.

“It’s common for people to want a whole lot of functionality and meeting all of the needs under the one platform or journey – that can be a disaster,” he said.

“That becomes too complicated and does not become clear for any user group with specific needs what the proposition is. Anything that is trying to do too much at once, can detract from the usefulness of it and impact the success of it.”