The Government’s Quality of Advice Review is one of the most important financial services policy reviews to be held in recent years. It will consider improvements to the regulatory framework to reduce complexity and better enable accessible and affordable advice for consumers, so they can access quality advice when they need it and in a form they want.
Included in the Review’s terms of reference is consideration of the opportunities for digital advice to address some of the industry’s impediments to delivering scaled and affordable advice.
But what exactly is digital advice? Isn’t it just a new name for ‘robo-advice’? And can it really deliver personal advice of the same quality and to the same compliant standards as traditional personal advice?
Although the industry often uses the terms robo-advice and digital advice interchangeably, there are in fact fundamental differences and, in our view, digital advice is the key to bridging Australia’s growing advice gap.
WHAT IS ROBO-ADVICE?
Robo-advice platforms, or robo-advisers, first appeared in the mid-2000s in the United States, gaining traction after the global financial crisis.
They are an online-only, direct-to-customer investment service that generally takes customers through simple fact-gathering and then uses basic algorithm calculations to suggest or allocate a suitable portfolio or set of investments (often a single multi-asset product in practice) which are managed on an ongoing basis for a fee.
Because of the relative simplicity of this approach, there are many providers of robo-advice services ranging from fintechs to major asset managers. The appeal of robo-advice for institutions is a new channel to serve and have a direct relationship with investors who cannot access or do not want traditional personal advice. Customers gain a quick, simple and affordable way to invest.
Robo-advice is usually delivered as general advice but can also be delivered as personal advice. When delivered as general robo-advice, there is no requirement for the provider to document the advice, although a Financial Services Guide and general advice warning must be provided to the customer prior to the general advice being given.
If delivered as personal robo-advice however, similarly to traditional human personal advice, the advice must be documented in a Statement of Advice (SoA) detailing the advice, how it is in the individual’s best interests and disclosing the costs and limitations of the advice.
Following robo’s launch in the US by first movers such as Wealthfront and Betterment, fintech entrepreneurs such as Nutmeg in the United Kingdom followed suit, offering robo-advice and related portfolio implementation and management. Despite a quality digital experience and low pricing, many early propositions initially struggled to gain traction due to lack of brand awareness and high customer acquisition costs.
However, in recent years both the US and UK markets have evolved significantly with the arrival of institutional incumbents launching robo-advice through their own platforms, especially Vanguard. Others have entered via acquisition of early entrants such as J.P. Morgan’s purchase of Nutmeg.
In Australia, robo-advice was seen by some as a way to reduce the cost of advice and make it easier for investors to access advice. However, take-up of robo advice in Australia has been low. Many institutions have taken a conservative position and have a baseline that interactions with customers should come with a SoA and the regulatory requirements that accompany this. Research shows that only 7% of investors in Australia have accessed robo-advice compared with 23% of investors in the US and 13% of investors in the UK .
Over recent years, advice technology has evolved to the level of sophistication that allows for compliant, personalised and engaging customer experiences – digital advice. The UK wealth market is seeing digital advice rapidly move to become a mainstream strategy where it is helping to close a significant advice gap.
Similarly in Australia, digital advice technology is available today and ready to be deployed by institutions and advice providers to bridge our own advice gap.
WHAT IS DIGITAL ADVICE?
Digital advice is the digital enablement of personal advice delivery. Unlike robo advice, digital advice is not simply calculators and investment risk engines, nor is it limited to investments.
Rather, digital advice delivers personal advice on investment, insurance, retirement accumulation (superannuation) and decumulation (pension) decisions and products. It combines customer facts with both regulatory inputs and assumptions where gaps exist, then uses sophisticated algorithms to produce single issue personal advice outcomes that comply with the Best Interests Duty and related obligations.
Compliance and other safeguards are built-in to the advice journey to capture all data points with full transparency, while quickly and easily identifying when customers are not suited to digital advice. This can be because of affordability, suitability or complexity of advice.
While a customer can be entirely self-directed in a digital advice journey and obtain advice with no human intervention, digital advice equally supports and leverages a human adviser-led model, or a combination of the two.
This is known as a hybrid model of digital advice delivery and demonstrates that technology augments human advice rather than replaces it.
A key advantage of this model is that it allows institutions and other digital advice providers to offer their customers the best of both worlds – consistency and accuracy in relation to functional and portfolio tasks, the convenience of an engaging online advice experience, and the assistance of a human adviser when required for more complex tasks and emotional needs.
Technology does the heavy lifting of data gathering and fact finding, while a human adviser can intervene at friction points along the journey. Technology also simplifies the compliance process with full auditability and transparency by capturing every data point and keystroke.
By leveraging digital advice technology, advice providers and advisers can better deliver to their customers’ preferences, scale their business models and leave more time to focus on delivering uniquely human skills.
WHO IS DIGITAL ADVICE SUITED TO?
Since the Royal Commission, the regulatory requirements for personal advice have increased significantly due to additional compliance burdens, more comprehensive due diligence processes, and more time required to meet the Best Interests Duty.
This has simultaneously increased the cost of financial advice and reduced the number of advisers available to provide it.
Meanwhile, the need for financial advice has only continued to grow as the population ages, with one in five people saying the pandemic has led to dramatic financial changes or extreme hardship and 25% of people worrying more about money than any other concern.
Financial advice improves wellbeing and should be both accessible and affordable for everyone who wants or needs it.
Traditional comprehensive financial advice has become more expensive and less accessible and not everyone wants or needs to deal with all of their potential financial goals simultaneously or continuously (as in a comprehensive financial plan). The typical customer for whom digital advice is well-suited only needs simple advice for a specific purpose on a piece-by-piece basis.
It’s far more likely that over time, customers who start with digital advice will evolve to seeking comprehensive advice for more complex circumstances from traditional advisers, than the other way around.
Digital advice technologies will help take institutions and advisers to the next level in their businesses. The cost effectiveness and scalability of digital advice lowers barriers to entry to advice for everyday consumers and allows institutions and advice providers to address a huge consumer market who need quality, easy to access and affordable advice.
By giving these consumers easy and affordable access to financial advice, institutions and advice providers can make a significant positive difference to their customers’ long-term financial wellbeing.
Craig Keary is CEO Asia Pacific at Ignition.
