The potential scope of digital disruption to the financial planning industry is an increasingly debated topic. There is a lot of hype surrounding the ‘development’ of the market and different opinions have emerged on what it means for advisers and investors. We define roboadvice and present some expert views on the service
Some financial advisors have called “roboadvice” ridiculous while others have been supportive. Some have asked ASIC to ban the service, while others say that financial advice firms should instead embrace roboadvice. So how do the various parties line up?
What is roboadvice?
Roboadvice or roboadviser platforms are online services for wealth management. Essentially, they use data and algorithms to determine where an investor should put their money.
Depending on the particular platform used, investors are asked a number of basic questions before the management process begins. These questions cover topics such as how much they earn and their investment risk appetite.
The market for these automated investment management services is much more developed in the US than in Australia. According to InvestSMART, Australia’s first roboadviser, an estimated USD255bn is expected to be managed via these platforms in the US by 2019. Below we have listed some commonly accepted benefits and drawbacks of roboadvice.
Benefits:
- Less emotion as the process is automated
- Built in tax function
- Automatic reminders and alerts serve as recommendations at the investor’s fingertips
- Cost saving as professional advice can be expensive
Negatives:
- Less emotion, limited human interaction
- No determination of financial experience or knowledge being utilised by the model
- Relatively new development so not extensively trialled and tested
- May not be suitable for complex financial situations
What are others saying?
Opinions seem to be sharply divided on the merits of robadvice and the best way for financial planners to respond. Below, we have listed some of those who believe the rise of roboadvice is an opportunity and those warn it is a threat to summarise the discussion in the industry.
Opportunity
Blackrock
BlackRock Blog Personal Investor Strategist Heather Pelant offered another perspective on the topic in her article Three Tips for Finding Good Financial Help
:
“There are so many resources available today – traditional financial advisor shops, direct brokerage firms, so-called roboadvisors, even financial apps,” Ms Pelant said.
“If you’re young and just starting out, you might want to try an online resource. If your situation is more complicated, involving issues like estate planning or tax treatments, you may want to hire an experienced advisor.”
KPMG
On 14 October, The Australian Financial Review published Roboadvice's push into financial planning quoting KPMG Australian Head of Banking Ian Pollari:
“Roboadvice is better than no advice, provided that there's the appropriate disclosures, and people know what they're getting through these roboadvice propositions,” Mr Pollari said.
Ernst and Young
Ernst and Young Partner Steven Nagle and Manager Anthony Saliba were published in Cuffelinks on 15 October in the article, The reality of roboadvice:
“We are still many years away from roboadvisors having sufficient artificial intelligence to replace financial advisers,” they said.
“However, advisers do need to acknowledge that…This is both a great opportunity, as well as a threat to those unable to adapt quickly.”
“Early movers who take advantage of these advances in technology will attract more clients, increase productivity, drive down costs and serve previously unadvised segments of the market…the ultimate winners are likely to be the end consumers.”
“With such a large portion of the population currently unadvised, and no let-up in the complexity of our financial system, this can only be a good thing.”
Personal Finance Society
At the CoFunds Conference on 15 October, Keith Richards, CEO of The Personal Finance Society said:
“Roboadvice is no threat to advisers. Allowing people entry points opens the door to complex advice later.”
Threat
Wealth Today
The Wealth Professional website published an article, Financial advice firm calls on ASIC to 'outlaw' roboadvice, which quoted Wealth Today Managing Director Greg Pennels:
“It amuses me that financial planners operating at major banks continue to get themselves into trouble and give our industry a bad name,” Mr Pennels said.
“Their response is to push the barrow for roboadvice and its one-size-fits-all approach to no-advice financial planning. It’s outrageous.”
CFA
On 15 October investor website Cuffelinks published Roboadvice disruption – you won’t see it coming which quoted CFA Co-Founder and CEO at BigFuture Donald Hellyer:
“The financial industry is locked in its current mindset and sees no immediate danger. But we forget that there are many more institutions that touch the mass market.” Mr Hellyer said.
“Who said Coles, Qantas or Telstra can’t take a crack at our industry? Roboadvice will materially reduce the cost of entry for many players. Traditional providers will need to be wary of disrupters buying a minority stake in a roboadvice start-up and offering very low-cost product to their sizeable client base.”
Conclusion
While face-to-face advice will continue to be more suitable for many investors’ needs, particularly while roboadvice remains a relatively untested method, digital disruption seems inevitable. For advisor firms, adjusting to this is less about competing with digital advice and more about considering how the digital element can supplement services that are currently offered.