Should investment be left to the robots?

As financial advice practices look to deal with a more commercially challenging environment there has been plenty of talk about greater use of digital, but that does not necessarily mean ‘robo-advice’.

While AMP Limited’s group executive, advice, Alex Wade has acknowledged that digital represents a core element of the company’s new advice strategy, Bell Direct head of sales and marketing, Tim Sparks, believes some advice practices will find more value in looking to digital options with respect to constructing investment portfolios, rather than delivering advice.

In Spark’s view, the application of digital is probably better suited to investment than to advice, – something which would allow advisers more time to coach their clients through difficult periods.

Discussing the evolving shape of the industry, Sparks said he believed advice businesses were going to have to put the microscope across their value proposition.

“Where technology is concerned I think advice practices need to separate out the investing component and advice component,” he said noting that technology had developed to the stage where it was well capable of developing robust investment portfolios while advice remained a much more complex service offering.

He said that by separating investment and advice, this would leave plenty of time for advisers to focus on planning, particularly in specialised areas such as estate planning.

“The wealth management component is important, but the fact is that technology means that really robust portfolios can be built quite quickly now,” Sparks said.

He said that if advisers were coaching their clients through periods of severe market dislocation then it became much easier for them to justify their fee.

“It takes a skilful adviser to navigate such periods,” Sparks said citing the market volatility which had accompanied the result of the Brexit referendum and then the ongoing uncertainty which had followed.

This contrasts with AMP Limited’s approach to the use of digital technology, with Wade confirming to Money Management’s recent Future of Wealth Management – Advice conference in Sydney that the company would be looking to take a ‘triage’ approach.

“For me it’s about somehow solving advice for the masses and the reality and economics today of face-to-face advice is that it has become too expensive for the average person and we look to now have a greater serviceability and delivery to those clients,” he said.

“And they can go up and down that model – they may be able to do everything digitally, they may be able to talk to someone on the phone or face to face, depending, and likewise they can go down [the system], for example, a high net worth individual may wish to be self-direct in the sense of knowing exactly what they want and how they want to do it and do it totally on digital if they want to.”

The Money Management conference pointed to the changing shape of the Australian financial planning industry in the wake of the Royal Commission into Misconduct in the Banking Superannuation and Financial Services Industry but also as a result of the ongoing impact of the Financial Adviser Standards and Ethics Authority (FASEA) regime.

Bell Direct’s Sparks pointed to the similarities between what is currently happening in Australia and the experience in the United Kingdom as a result of the so-called Retail Distribution Review (RDR) which came into effect in 2013.

Prior to the RDR many financial advisers were charging via commission but not unlike the current environment in Australia the RDR sought to lift adviser qualifications and virtually the separation of product and advice.

Bell Direct’s Sparks said there were some parallels to what had been witnessed in the UK and what was occurring in Australia now.

“We’re seeing a move to what happened in the UK, numbers will play out in the next two years, but the drop in adviser numbers in the UK was about 20%, time spent by advisers declined by around 40% and the reduction in the number of people providing advice led to higher cost,” he said.

However, he warned against making too much of what was uncovered by the Royal Commission in circumstances where its terms of references directed it towards discovering poor behaviour rather than examining all behaviour.

Sparks said he believed this had given rise to a perception gap in the community which needed to be addressed by the financial advice industry.

“We know that 90% of people who receive advice are happy with it,” he said. “The trust problem resides with those who have not received advice and don’t understand how it is delivered. It is incumbent on the industry here in Australia to fill in that knowledge gap.”

Sparks said that it was in that respect that he believed that the FASEA regime would ultimately help repair the reputation of the industry and deliver financial advisers a lot of credibility over the long-term.

“The educational component is a fantastic thing for the industry and will lead to a lot of credibility over the long-term because it will be anchored around consistent education across the industry and that can only be a good thing,” he said.

“Education can never make the industry worse,” Sparks said.

Acknowledging the growth in self-directed investing and the role played by Bell Direct, he said that trading volumes had been up this year and that on days when dips occurred in the market clients tended to be net buyers.

“We’re also seeing clients more diversified than they were 10 years ago,” he said.

“In the retail space its always been a case of portfolios being overweight Australian stocks. These days they are more diversified – add in two ETFs [exchange traded funds] and you’re redefining how they are accessing investments.”

Amid the different approaches with respect to how technology would be utilised with respect to the delivery of financial advice, key planning group heads attending the

Money Management conference agreed that the Royal Commission and the FASEA regime were having a fundamental impact on the value of advice businesses.

Three senior dealer group executives agreed that multiples of as high as 2.5 times revenue were now unrealistic in the context of today’s industry.

CountPlus chief executive, Matthew Rowe, said that it was common for small accounting practices to be valued at between 80 cents and $1.10 and he believed that advice practices would need to adjust to a similar reality.

Centrepoint Alliance chief executive, Angus Benbow, agreed with Rowe that changes to the industry, not least around grandfathered commissions, had had a fundamental impact on valuations.

However, Rowe acknowledged that notwithstanding the realities confronting advice practices, he still regarded them as being between 5%-7% more profitable than accounting businesses.

“The days of trading on revenue are gone,” he said.

The conference also heard that these factors had also played into AMP’s approach to Buyer of Last Resort (BOLR) arrangements which had seen a reduction from four times to 2.5 times under new contracts issued by the company.

Some AMP advisers had said the BOLR changes had left them ‘under water’ with businesses formerly valued at around $2 million (excluding debts) now valued as little as $200,000.