Your IndustryFeb 24 2016

Why we need to learn to live with robo-advice

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Why we need to learn to live with robo-advice

‘Robo-advice’ was a term that proved difficult-to-pin-down in 2015 and, so far, 2016 is proving to be no exception in this regard.

While it is understandable that some in the industry cling to it as a familiar description, of the many new digital players entering the market, the term itself is very misleading.

Robo does not necessarily exclude human interaction and, in fact, this is still essential in many situations.

Ultimately, robo-advice is a misnomer and, as a term that’s (mis)used frequently in the market, it does not account for the widely differing forms of advice that individuals will need in the future. Although we are witnessing the first major forays of robo-advisers into the UK market, it is hard to see how it will replace face-to-face advice completely across the board.

Rather, it will complement traditional advisory services, and the increase in interest serves as a reminder that firms across the financial services sector must put investment in technology at the heart of their approach if they are to adapt to these new (and radically different) market conditions.

As a result, it is less a question of what the future holds for robo-advice, and more one of how advisers address the way end customers will want to interact with their technology in future.

Too much confusion plagues consumer understanding of the subject, and there is a growing risk that it is seen as a ‘silver bullet’ for the market’s large – and growing – advice gap. This fact forces us to recognise another fundamental paradox: there has never been a better time for consumers to seek financial advice, yet the costs and risks of providing that advice have never been greater.

Is it possible for the industry to agree on a new standardised set of definitions as to what is meant by robo-advice? In my view, it will at least be necessary for a clearer distinction to be made between execution-only services, guidance and the traditional forms of advice – all of which can often be lumped together under the heading of robo-advice.

What does the future hold for the industry?

From our own experience of the US market, robo-advice is still in an embryonic state of development, although predictions for growth are strong. A recent research study by Celent (Celent, Robo Advice Research Study 2015) predicted that by 2020 robo-advisers will run $255bn (£179bn) of client money globally. Although the robo-advice firms that have appeared in the US to date are able to operate on a small (and often quite specialised) scale, they may not, in my view, be able to fulfil the continuing need for face-to-face advice on the part of large segments of the market who have more complex needs.

Key points

Robo-advice does not necessarily exclude human interaction.

Robo-advice is still in an embryonic state of development in the US market, although predictions for growth are strong.

A major key to empowering consumers is the simplification of the investment process through the greater use of technology.

Human involvement and interaction on the adviser side is still required for so-called robo-advisers to be able to offer a comprehensive range of advice, and this of course is likely to raise future questions about the precise nature of robo-advice from a regulatory standpoint.

However, with these opportunities comes greater choice and complexity for investors and savers. Alongside the well-documented post-Retail Distribution Review advice gap, a comprehension gap has grown up between consumers and the advisory market. Even terms commonly understood by industry professionals such as asset allocation, often pass consumers by, and this is a shortfall in knowledge that needs to be overcome as soon as possible.

The key priority for wealth management firms is how best to make these services as accessible and understandable as possible for the average consumer. From this, it stands to reason that companies who put this at the heart of their approach will do well in commercial terms.

This all takes place amid turbulent market conditions that are sure to grow as more funds that previously offered annuities become open to investment. Coupled with historically low cash deposit rates, those needing to grow their wealth will find that they will need a diverse financial strategy if their financial aspirations are to be met.

There is a greater appetite for solutions that will address some of the simpler elements of an adviser’s role. In this respect, robo-advice is likely to feature more prominently for some, but not all, individuals.

Although, in the short term, many investors are wedded to face-to-face advice, with younger generations continuing to embrace technology as a way of organising, compartmentalising and streamlining their day-to-day lives, robo-advice, and the availability of it for consumers, will only become a bigger consideration for the advice agenda. As with a range of other industries, a major key to empowering consumers is the simplification of the investment process through the greater use of technology. There is a benefit here for advisers too. By introducing a greater understanding and awareness of how technology can improve consumers’ experience, advisers can cut costs substantially.

The move towards digitalisation cannot be stopped, and advisers need to embrace it rather than fight against it, recognising the benefits not only to their customer base, but to their own businesses in terms of efficiency. The key point is that robo-advice, without any human interaction, is unlikely, at least for the foreseeable future, to be a one-size-fits-all solution and there will still be a role for advisers. Combining face-to-face advice with the use of technology could even make advisers appeal to a broader segment of the population by allowing them to grow their business efficiently.

Brett Williams is managing director, SEI Wealth Platform, UK Private Banking