The most valuable service a financial adviser can offer is being able to tailor asset allocations for clients based on their personal circumstances.
The sales and product culture of the past are slowly being replaced by a consumer-centric culture. As the term suggests, the concept is about giving the customer top priority in every business practice.
A big driver of this change has been the rapid development of technology. Easy access to information on the internet and social media means consumers are increasingly market savvy and are comparing product costs, service and offerings.
Moreover, the media spotlight on the financial services sector in recent months on the back of scandals at Macquarie Bank, Storm Financial, and the financial planning arm of the Commonwealth Bank have brought the industry into the mainstream psyche.
Consequently, automated investment services, or robo advice, looks attractive to self-directed clients, clients who want to avoid the costs of going to a human adviser, or clients with insufficient assets who do not qualify to see an adviser.
The Oxford University's Oxford Martin Program research found last year that financial advice risks a 58 per cent chance of being replaced by automated advice.
The proffession is among the top 10 threatened by automation and technology within 20 years.
Software provider Provisio believes technology is the key to reaching the 80 per cent of Australians do not receive financial advice due to the failure of traditional advice models.
Investment Trends senior analyst, Recep Peker, said when they asked people how they prefer to receive advice, almost everyone said face-to-face.
But when costs are factored in, only five per cent of Australian adults prefer the traditional face-to-face comprehensive advice model.
The Investment Trends August 2014 Advice Report revealed that 42 per cent of the 6256 Australian adults surveyed are self-directed investors who prefer to do it themselves.
Moreover, 25 per cent of respondents prefer piece-by-piece advice if it is cheaper.
The study also found that 10 per cent of Australian adults prefer to get piece-by-piece advice online, and this is mainly among those aged between 30 and 44.
"This is very interesting because when you give them options to choose and pick what their preferred form of receiving advice is after factoring costs, 10 per cent is a fairly big proportion of the population," Peker said.
The research also noted general openness to getting advice online, with 30 per cent of respondents saying they would be likely to do it. Nearly half of those under 29 are open to getting financial advice online.
Founder and non-executive director of ETF Solutions Tim Bradbury sees possibilities of robo advice flourishing among the self-managed super fund (SMSF) market.
"The main drivers behind people setting up their own SMSFs are what we call the three Cs: choice, cost and control. If you don't want to pay for an adviser or you only want a little bit of help on an as-required basis, there is not a lot of help out there on portfolio management of your fund," he said.
The SMSF portfolio traditionally comprised of Australian shares, plenty of cash and some direct property. This was because it was easier to buy Australian shares than fixed income securities or international shares.
But the exchange-traded fund (ETF) evolution has allowed SMSFs to invest in these areas. A portion of these investors desire limited advice on their portfolio rather than comprehensive financial advice, and Bradbury believes online portfolio management or robo advice appeals to them.
A client who goes to a financial adviser usually has to pay three fee components: one is the adviser fee, the second is the portfolio or fund manager fee for asset management, and the third is a fee for administration wrap or a master fund.
This comes to approximately 2.5 per cent of funds under management (FUM).
Bradbury compares this to online robo advice, which he suspects will probably be around 50 to 100 basis points of FUM, or between 0.5 to one per cent.
"That's a big difference and 2.5 per cent on a big portfolio of assets is a meaningful saving for an investor over 20-40 years," he said.
Robo advisories like Betterment, FutureAdvisor and Wealthfront have blossomed in the US over the last four years.
In fact Wealthfront has almost $2 billion in FUM after launching around three years ago.
In Australia, a sceptical portfolio manager who wanted to skip traditional channels and directly offer clients investment services launched a robo advisory called Stockspot around two years ago.
Former UBS fund manager Chris Brycki wanted to create an advisory service that sits somewhere between a do-it-yourself investment service and one where clients go to a traditional financial planner.
"There are probably two ways for a person to invest: one is to do it yourself, where you set up an e-trade account or a bell direct account and go do your own trades," he said.
"But most people, especially people who aren't in the financial services area don't really know how to do that. The other choice is for people to go through a traditional financial planner."
But Brycki identified two problems with going to an adviser: one is a minimum asset requirement to qualify for advice, and the other is the fees, which he feels is not justified for the service clients receive.
Two kinds of clients are opting for robo advice.
One is the younger group below 45 who are looking to accumulate savings or additional interest in their accounts.
"A lot of these people wouldn't be able to see an adviser normally because they don't have enough money or because they don't see the justification for paying thousands of dollars in fees."
The other is the SMSF segment, who would rather outsource the investment piece of the portfolio than see an adviser.
Operating as an authorised representative of financial services house Calibre Investments, Stockspot designs portfolios using a financial advice algorithm.
Based on clients' responses to a risk questionnaire, it will gauge their risk tolerance, investment horizon and liquidity needs to create an investment portfolio mix of Australian, global and emerging markets.
Stockspot then builds a client agreement, which the client reads and digitally signs with their name, IP address and the time signed.
Stockspot automatically rebalances the portfolio as per the risk profile over the year.
It charges a single fee of $77 a year, plus an investment fee of between 60-90 basis points of FUM per annum.
Financial services lawyers, the Fold's, managing director Claire Wivell Plater said robo advice is very cost effective, as it charges a flat fee rather than an asset based fee, which is incredibly appealing to clients.
Humans over robots
The financial services industry does not deny the increasing role of technology in the sector, and some even say robo advice will thrive in the future. But many are sceptical about whether this really constitutes advice.
Paramount Wealth Management principal Wayne Leggett said if an advice business' service offer is more around portfolio construction and maintenance than it is about strategic advice, then there is no question that robo advice is a threat.
He said robo advice is very attractive to those people who do not engage with an adviser at all due to factors like cost constraints.
"But that sort of functionality isn't going to help you in terms of any kind of strategic advice like analysing alternative strategies, and mapping out a financial program for the medium to long term."
Wivell Plater agreed, and said robo advisors like Stockspot only use ETFs and is not suitable for all investors.
She said robo advice would be appealing to self-directed investors, those who have had bitter experiences with advisers, or those who are in the accumulation phase with simple requirements.
Robo advice is in its infancy in Australia at present but has the potential to thrive like it has in the US.
"In the US some of the robo advice capabilities that have been developed are actually being used extensively by advisers, and they are replacing existing adviser software and indeed their platform as well," Wivell Plater said.
She said advisers in the US who use this technology find it is a more efficient means of servicing clients than the financial software and separate platforms that exist in Australia.
Although robo advice is available for client use, Wivell Plater said the level of sophistication means advisers are getting more use out of it than self-directed clients.
She does not foresee robo advice as a threat to traditional financial planners or personal advice.
"To be honest, people want to have the comfort of knowing that someone has reviewed their situation personally," she said.
Financial services technology company AdviserLogic's head of product development Daniel Gara concurs, saying that while he is a technologist, he believes technology can better support advisers to deliver an enhanced service level.
Gara also believes the advice coaching market for high net wealth investors is very much secure.
"The adviser could use the software to develop an even better strategy for their client. But the best strategy in the world is useless unless you execute it," he said.
"The adviser's greatest skill and talent is in explaining the strategy to the client and ensuring the client executes the strategy."
Getting with the times
Australia still lags in handling electronic disclosures as it still has inconsistent and restrictive requirements, which means there is a doubling up of documents for clients.
For example, while the law allows electronic disclosures, there also seems to be a need to send an e-mail or notification to the client about the availability of the document in addition to displaying them online.
"The legislation does not contemplate that the clients will deal entirely electronically with the business and that it should be appropriate for disclosures to be provided electronically on the website as opposed to having to either e-mail, text or post it to somebody," Wivell Plater said.
The Australian Securities and Investments Commission gives relief through class orders to facilitate electronic disclosure.
But start-up robo advice companies might find this expensive, and hence opt for more clunky methods of disclosure that are currently available.
Playing the sleuth
Morningstar released a report in January, which warned advisers and clients to ask important questions before using robo advice.
They must ask who is behind the "pretty internet pages", what the principals' background is, what qualifications they carry and whether they have wealth management expertise.
They must then think about what the asset allocation framework is, and who is compiling it.
Perhaps the most vital question for clients to ask is whether the fees are cheap enough to warrant using robo advice instead of a traditional financial planner.