Robo-advice no panacea

25 October 2019

Both AMP and the Australian Securities and Investments Commission (ASIC) are wrong to suggest that robo-advice will be sufficient to meet the needs of anyone earning $80,000 because reality suggests otherwise, according to economist and managing director of The Investment Collective, David French.

Commenting on the recent announcement by AMP that people earning an average $80,000 a year did not need an ongoing relationship with a financial adviser, French said it demonstrated a “cavernous disconnect between facts and reality”.

He said that, while there seemed to be a view that the costs of financial planning could be reduced to such an extent that it became affordable consistent with some “Aldi-style benchmark”, the facts suggested otherwise.

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“Considering it takes at least a week to interview clients, collect and verify data and write and present a draft SOA, the cost of provision is at least $4,000”, Mr French said.  “Add the cost of structuring and implementation and you are well on the way to 5 figures”.

He said he did not believe that robo-advice was the panacea being put forward by ASIC and others.

“Financial advice comprises an interaction between Investment, Superannuation, Tax, Social Security, and often other considerations. Those four factors alone suggest 24 different permutations and combinations.  Add two more factors and you get 720 possible outcomes,” French said.

“As every financial adviser who has actually been providing a service knows, from concessional limits to non-concessional, from small business to trusts, and from student allowance to age pension, each of these overarching categories comes with a range and complexity that brings possible combinations to inconceivable numbers,” he said.

French said that even if he was wrong about the capabilities of robo-advice, no one should expect that the regulators would make clients responsible for the data they entered and the outcomes they generated.

“They will not – they will expect the licensee to have performed relevant checks as per the Best Interest Duty,” he said.

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Sounds like Kodak talking about the virtues of film and pointing out that digital cameras will never work

Hi Kodak,

I agree with your comment. It does sound as though adviser are "talking their own book", as brokers say.

Yet there is logic underpinning some of the comments being made. There are so many side issues that cloud the topic. The industry major players have been product flogging for decades; vertical integration has hidden issues of bias and distorted interpretations of 'client best interest'; Volume bonuses and margin sharing and who knows what else backroom deals have made it very difficult to identify simple financial advice from product based advice.

The Royal Commission final recommendations failed to make any suggestions for change to core conflicts of interest or structural pressure points for ethics. As an adviser who has attempted to deliver basic financial advice with product as a secondary aspect, my efforts have been thwarted by every regulatory attempt to stop the product floggers and inherent structural bias.

There's no point crying about any of this. The changes have been pushed through, with little regard or even in spite of, evidence-based need for change. Advisers who have simply scaled up their minimum client requirements see no problems with the changes - they've simply adapted as they are supposed to.

I doubt anyone making comment on such matters has ever sat down at a product pricing meeting, to try to work out how to deliver cost-effective services to this section of the market. If they had, the discussions would be very different.

But again, i agree. We advisers who have been trying to continue to be available to this market segment do sound like we are a whinging lot. Let's just hope that someone in robo-advice land can work out a way to deliver something helpful to the people who aren't good with computers, who dislike thinking about money and who don't have time to look past the first line in any application or strategy suggestion.

“Robo-advice” has a place in financial planning but it is an extremely limited slice of the total planning role. Robo-advice assumes (1) a knowledgeable, competent user (2) dismissal of the importance of secondary outcomes (3) an understanding of the original objective’s role in the overall planning intentions of the individual (4) a well-designed user interface (5) a lack of fundamental bias on the part of the robo provider (6) user understanding of the potential for such bias. I have identified these on a superficial consideration, and there are many besides.

The reality is that few $80,000 income earners are able to identify more than half of the potential roadblocks to good advice. That makes sense, as their priorities and expertise lay elsewhere.

Regulators, legislators and consumer groups are generally composed of stable income, financially secure, knowledgeable and well-resourced individuals. I have come to believe that most comment and perspective has become narrowly focused from this viewpoint. This is resulting in a bias against long term personal adviser relationships.

People need help filling out forms. Such basic skills are not standard across the community. People can read a text three times and not get the gist of what is being asked or what they should do. People get frustrated at robo-anything(!) and after multiple attempts to finish basic tasks, would employ a garden gnome if it helped just get the job done (Apple ID problems, anyone?).

Our business has 30+ years history of providing services to clients. These services can be very basic - but at the same time, very much appreciated.

In 2003, we wrote to our 1,200 clients and informed them the world was changing. That the future involved direct fee payments for service and advice. We set up a separate company to deal with those who wanted direct fees and customised services. Those who remained in the older structure, were confirmed as paying us for account services via commission. The offer to change service structure was left open.

Most chose to remain on a commission basis and to make use of our services when they wanted to. We tackled conflict by retaining an open APL, by refusing to deal with any product that required volume of business, and by making products a secondary focus to strategy.

That allowed us to meet the desire for a personal contact point, while providing hourly-rate, product free advice as required.

New legislation will stop the commission payments. Illegal cancellation of contracts will reduce our legacy client income which will force some to not use our services. There are a lot of people who are prepared to pay a fee from a product for a product service, but not to pay a direct fee. These people will try robo advice and when that fails, will come back to us for help. That help on a transactional basis will be more expensive.

There is a very primitive interpretation of client behaviour and attitudes that is prevalent in current discussion of financial planning. This includes planners with narrow, wealthy client bases and those who have no legacy clients.

In all my experience, a single-model planning perspective fails in so many ways. Legislators, regulators and consumer groups fail miserably to identify their own bias. Well-meaning changes achieve little if they are not evidence based and implemented with thought to market stability and transition outcomes.

Robo advice will help a narrow slice of the community meet a narrow slice of their needs. Everyone else will be lost in an Apple-ID, Windows round-robin, Facebook/Instagram complaint resolution round-robin of frustration.

Long term personal financial adviser relationships are useless and pointless, unless you have one.

Robo advice can be delivered for a low cost. The technology part is easy. The difficulty is that when a client provides an answer, and has no idea of the implications of their answer from that point on they don't get the correct outcome for them and their answer that is a 'nice to have' will determine their advice product solution.
I'm betting in most cases will end up in the more expensive, "robo providers" solution.
Ask the question the way you want the answer and all of a sudden we've met a client goal with 'our' product.
"Would you like insurance where the insurer can change or cancel your insurance at any time or would you like a policy that is guaranteed to remain in force for as long as you pay the premium?" - Hey now we can churn you to our insurance product.
Oh and your existing fund doesn't allow rollovers for insurance. Well since we have to set up new insurance with someone else we'll also have to move your super. And since you said you wanted to select your own shares we'll put you in our expensive WRAP account.
Clients do not understand the impact their 'nice to have' will have on their 'product solution' and will likely end up in a solution they don't necessarily need.
Now if we can drive the Robo advice for them and explain the implications of their inputs, we can get somewhere.

Is this advisers saying “Add the cost of structuring and implementation and you are well on the way to 5 figures” - but someone earning $80K (<$60K after tax )should pay nearly 20% of their disposable income to an advisers??? If it costs that much then I'd have to agree that someone on $80k shouldn't get advice!

It cost that much due to compliance- and more to come at the direction of ASIC. Next step, seems ASIC wants robo advice. Have you looked at and found any ASIC Commissioners on the board of robo advice business?

Actually, no. It is advisers saying that the costs of providing effective advice have become prohibitively expensive, and one of the prime ways of alleviating that cost - an ongoing retainer that helps a business stay afloat between calls for services - is being highlighted as worthless, poor management and somehow, unethical.

I do find it interesting that advisers are, for the most part, trying very hard to find ways to continue to provide services to this segment of the community, while others are purporting to speak on public behalf yet have little understanding of the on-the-ground issues being confronted.

Unfortunately, debate is often replaced by name-calling or straw-man arguments or any one of a slather of logic fallacies. Loud and often conflicted voices seem to have priority over any call to logic and actual evidence.

But I am a dinosaur in a post-meteorite environment, apparently

I would think at least 50% of my clients earn less than $80,000 per annum. Especially right now, in drought, with a significant proportion engaged in primary production. They need me now as much as they ever did.

Pity I won't be able to give them affordable advice much longer and will have to exit the industry. Before I depart, I'll be referring them all onto the Financial Planning Association to meet my obligations under the FASEA Code of Ethics, so that they can find amongst the membership base advisers who know better than me how to provide suitable advice for a rate that this client group can afford.

We (Planners, Associations,Consumer Groups, Government) wanted a profession. From January 1, 2020 especially, we will finally have one. Congratulations to all of us whom have worked so hard over decades to achieve this outstanding result for the people whom need us most.

Then there are the older people and others, on Centrelink. Some affected adversely by Robo Debt. Suggest Robo advice to them and a pre-paid funeral plan will be the next asset they call on.

I understand AMP's position though. There is no in-house product that they have that can be sold for them to earn a buck on for many of these low income earners. They shouldn't be in the advice business.

Yet again the financial planning role is reduced to investing. Unless there has been a recent breakthrough with AI , all robo platforms essentialky deliver are risk
profiling and a subsequent portfolio reccomendation (usually made up of index products)commensurate with the prifile.

I still believe that planning has a great many more facets than just this aspect. If only the financial institutions were of the same opinion.

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