The financial advice industry is undergoing a major transformation and financial advisers face an increasing number of constraints on their time.
Current risk and compliance requirements are a result of numerous inquiries into the quality of advice provided by the financial planning industry and are designed to protect consumers, something of which the industry as a whole is supportive of.
However, it cannot be denied risk and compliance work now takes up a significant proportion of time for financial advisers, with research from the ‘Australian Financial Advisers Wellbeing Report 2021’ from AIA and the Association of Financial Advisers (AFA) showing it now accounts for nearly 30% of all work tasks. Unfortunately, for consumers, this has led to advice fees increasing 28% in the past two years.
Not only are more and more financial planners leaving the industry in droves as a result, but advice is also now more expensive and less accessible than ever.
But there is some positive news. Technology around advice is evolving, and it can now offer financial planners valuable support in certain areas, helping reduce these time constraints and costs.
BEYOND ROBO ADVICE
Robo advice has been around for more than a decade. When it originally launched, in response to the Global Financial Crisis in 2008, there was much hype and fanfare, along with a concern that it would displace traditional advisers. This has not eventuated. While robo advice, in the pure sense of the word, provides a solution for some clients with simple needs, the margins for operators can be low, and many have closed their doors.
However, this does not mean that the robo advice experiment has failed. New and evolving digital capabilities are today being used to augment a human advice model. Digital advice technology has been reimagined as a helping hand to the traditional adviser, not a replacement.
Digital advice can assist financial advisers across the entire gamut of the advice process – from education and engagement, fact finding and data gathering, to then delivering the advice and the ongoing communication and servicing of clients.
For example, solutions powered by artificial intelligence (AI) now available are sophisticated enough to work out what the effects of increasing mortgage rates would have on a customer saving for a home deposit.
Other digital developments and advancements can also be used in an adviser’s favour. Open banking, which is in its infancy in Australia, provides third-party financial service providers open access to consumers’ financial data using open application programming interfaces (APIs) with the consumer’s permission. This alone can digitally assist financial planners in the initial stages of their fact-finding process.
THE ROLE OF REGULATORS AND GOVERNMENTS
One of the many concerns that financial planners have about digital advice is whether or not is supported by regulators and government. It’s all well and good to be able to use AI-powered solutions to conduct a fact find for a client, but will it stand up to scrutiny by the regulators?
The good news is that the government is recognising the role that digital advice can, and should, play in a rapidly-changing financial advice landscape. Today’s digital advice solutions can do the heavy lifting within the constraints of the regulatory environment and with the support of government.
In her recent address to the AFA conference, the minister for superannuation, financial services and the digital economy, Senator Jane Hume, acknowledged the importance of ‘digital augmented’ advice, where, for example, a customer might input their information into an online tool, and the software behind it creates the basis for a statement of advice, which is then used by a financial planner.
“Digital advice will not replace advisers, it will augment them and enhance their capabilities. Advisers will be able to better serve more clients at lower costs, helping make advice more affordable and accessible than ever,” Senator Hume told the conference.
The regulator – the Australian Securities and Investment Commission (ASIC) – has acknowledged the role that advice can play for consumers in making better financial decisions and the importance of affordable advice.
In ASIC Regulatory Guide 244: ‘Giving information, general advice and scaled advice’, ASIC has also provided considerable guidance on how to provide advice on one or less than a full range of issues and has indicated that guidance is appropriate whether the solution is human or digital.
ASIC recognises Australians’ need and desire for single issue advice in some circumstances and have provided the relevant guidance to enable institutions and advisers to deliver it regardless of the method of delivery.
HOW CAN IT WORK FOR YOUR PRACTICE?
One of the most time consuming and costly tasks for a financial adviser is the initial client fact-finding process. As all advisers know, the more information you have about a client – their financial needs, approach to risk and personal situation – the better the advice you can give.
Digital advice can automate at least part of this process and drastically reduce the time taken by this task for an adviser. As it becomes more accepted in Australia, open banking and open finance should also improve access to data to streamline the advice process – for example, through pre-filled fact finds. Cashflow modellers available through open finance would save advisers time by allowing customers to see, in real time, how altering their financial arrangements could impact them in the future.
Fact-finding questionnaires can also be developed that can send clients down particular paths based on their answers to previous questions and provide the adviser with a much clearer picture of the client’s financial situation and needs.
Advisers do not need to be concerned that digital advice will not help them meet their best interest duty obligations. Technological advances mean that most digital advice solutions now have in-built compliance and safeguards which can identify when customers may not be suited to automated advice – potentially because of cost, suitability or complexity – and triage them out of the advice process to speak with a human adviser.
Digital advice is not limited to investment advice and which investments funds should be allocated to. Algorithms have now evolved to provide consistent, strategic and compliant advice. Old robo advice solutions may have had ten calculations in their algorithms, whereas digital advice algorithms now have hundreds and can assess whether or not someone should even be investing in the first place.
THE BOTTOM LINE
Digital advice solutions are not a replacement for human advisers. They exist alongside a human adviser and are serving a market that may not be ready yet for comprehensive advice and a market which is self-directed and prefers to do things digitally but have the adviser on hand to help when and where required.
Ignition research from the UK highlights that there are two things people will always rely on expert, human reassurance for – health and finances. If COVID-19 has taught us anything, it’s that even for areas such as medical services, technology has a role to play – telehealth is a good example. The use of e-doctors and video consultations has allowed skilled GPs to provide referrals, prescriptions and reassurance to people in a controlled way, avoiding unnecessary risk in the process.
We believe that financial advice will follow a similar path to health and that digital or hybrid financial advice will gain significant traction in the years ahead.
By using technology to do some of the grunt work, advisers can make their advice process more cost efficient, and that in turn frees up time to see additional customers. For the consumer, digital advice can provide a more affordable, flexible and high-quality advice experience – and closing Australia’s advice gap is good for everyone.
Craig Keary is chief executive - Asia Pacific at Ignition.