Human vs robot: the battle for advice

Red tape has been suffocating financial advice for years. It’s time for regulators to turn their attention to the army of emotionless robots who will be joining the profession.

Human intelligence has superior attributes to artificial intelligence. These attributes get less air time than ChatGPT. We are emotional creatures, capable of compassion and empathy. We are creative and intuitive. It is these characteristics that can and should be leveraged as we evolve our service industries that, at their core, are about helping one another.

Financial advice is a service industry. Advisers help their clients. Being a compassionate, intuitive, creative human shouldn’t be discounted. It certainly shouldn’t be overregulated. What does require the watchful eye of regulators, however, are faceless generative AI tools that have no compassion, creativity or intuition. There are many reasons for this. An obvious one is accountability.

Let’s say a 45-year-old part-time worker earning $60,000 a year with a super balance of $120,000 uses an AI adviser. This person believes they can’t afford to see a human adviser. They read somewhere that financial advice is expensive, and besides, their industry super fund has a ‘Chat to an adviser’ button on its app.

After asking a few auto-generated questions, the chatbot advises them to switch their superannuation from balanced to high growth. A life insurance box is ticked. Investments are changed. This person is now on a high growth option with higher risk, higher fees and is paying premiums on two life insurance policies.

What the chatbot didn’t realise, because it couldn’t (it is not a human being), is that the 45-year-old ‘member’ just lost her husband and is grieving. In a moment of emotional stress she jumped on the app, ticked a few boxes, answered a few questions, and was advised to change her retirement plan. She is now paying for two life insurance policies and higher fees on her super, which is invested in riskier assets as she approaches retirement. Who is accountable for this?

Digital advice providers in Australia are already lobbying for regulation. Though what this will look like remains to be seen.

In a statement made to Money Management's sister publication ifa, an abrdn spokesperson said the “ambiguity” of the local regulatory environment had prevented it from moving forward with its digital advice product.

“Once the regulations are in place, we believe the opportunity for abrdn to leverage our UK expertise in digital advice into Australia is as positive as ever,” the group said.

Yet the UK regulator, the Financial Conduct Authority (FCA), published research in November 2019 questioning the viability of digital advice.

Research carried out by FCA economists found substantial resistance among consumers to robo advice, and identified a “hard-core of robo-refusers, who have something of a disposition to reject advice from an algorithm.”

“Worryingly, these robo-refusers may well be the very people who might need it most,” the research noted.

The FCA surveyed 1,800 individuals to explore attitudes towards robo advice and potential underlying drivers.

They were presented with hypothetical situations in which someone has been offered investment advice from a robo adviser. They were then asked whether they would recommend accepting or rejecting the advice.

The trials were conducted online and along the way individuals were assessed for their own financial literacy and a range of other personal factors, including loss aversion, key personality traits and standardised measures of trust in corporations, banks and other people.

The majority (57 per cent) rejected the advice offered by a robot.

‘Poor’ robo advice, where the advice was a mismatch to the stated objective and risk appetite, was rejected in 58 per cent of cases. ‘Higher quality’ robo advice that closely matched the stated aim and risk appetite of the hypothetical investor was rejected in 56 per cent of cases.

What these findings suggest is that most people in the UK aren’t interested in taking advice from a robot. If the financial services industry in Australia wants to turn on digital advice solutions, it better make sure people want it.

Robo-advice makers will read this article and suggest ‘hybrid’ advice is the best of both worlds. But their version of hybrid advice may be very different to a consumer’s.

‘Hybrid’ could see consumers becoming so disheartened by technology that they are forced to call a human being and actually pay for real advice.