OracleSep 11 2019

Will tech change advice?

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Will tech change advice?

Technology has permanently reshaped so many industries. 

In 2019, Amazon surpassed Walmart to become the world’s biggest retailer. Alphabet is by far the largest media company by advertising revenue. Facebook has changed the way we consume news. Uber and Lyft have altered the transport industry, while Tesla’s market cap is greater than that of BMW. 

Hargreaves Lansdown, an online direct-to-consumer platform, is now bigger than Schroders, and Airbnb’s potential initial price offering value may make it larger than any hotel chain. The speed and magnitude of these changes is quite remarkable. 

Most advisers find that the cost outweighs the benefit of delivering face-to-face advice to the millions of smaller clients in the market

The message is clear: technology, big data and artificial intelligence will eat all of our lunch, eventually. But will it? Could robo-advice make face-to-face advice redundant?

Robo-advice

One strong argument for using a robo-adviser is the role that markets have to play going forward. 

If, as seems to be the consensus, we end up with prolonged low market returns, an advice fee of 0.75 per cent may well prove too costly when real returns from investment markets are in the single digits. 

Digital advice might be one way out of this – which we shall return to further on.

It also seems most advisers find that the cost outweighs the benefit of delivering face-to-face advice to the millions of smaller clients in the market (the so-called advice gap).  

There is also the profitability motive, more broadly. 

If advice could be dispensed quickly and cheaply in a way that is highly scaled, automated financial advice should be pursued purely for self-interest. Perhaps robo is the future, then.

Yet, in practice we find penetration rates are both low and slow, unlike other industries where technology has dominated quickly. 

The Financial Conduct Authority’s Financial Advice Market Review baseline report (albeit from 2017), suggested that robo had penetrated less than 1 per cent of the retail market. 

Nutmeg, considered a leader in this space, showed in their latest publicly available financials (as at December 2017) that since launching in 2013, they only surpassed £1bn in 2017. 

Nutmeg also claim they are the most recognised online investment brand in London. But in spite of their significant brand power, clients have been slow to move.  

Prominent US robo-advice brands like Betterment and Wealthfront (both founded in 2008) have around £15bn and £10bn respectively, which seems small to us.

As Schiff and Taylor assert in their 2016 McKinsey report (Key trends in digital wealth management – and what to do about them), the “client uptake of digital advice offerings is slow.” Why is this?

The World Economic Forum 2018 Future of Jobs Report estimated that by 2022, machines will do more than 60 per cent of administration work and 60 per cent of information and data processing.

The report also suggests that machines will do almost 40 per cent of communicating and interacting and up to 30 per cent of so-called “advanced tasks”, like reasoning and decision-making. 

It posits the theory that lawyers will become redundant, as will sales agents and even financial analysts.  

But, it interestingly argues that the role of financial and investment advisers will remain stable.

Is advice safe?

According to a 2018 study by Vanguard, The Future of Work, technology will likely impact “basic” skills such as recording information, and “repetitive skills” like receiving and processing information, monitoring and scheduling.

“Advanced” skills such as maintaining relationships, interacting with the public, persuading outcomes, applying knowledge, strategising, solving problems, thinking creatively and caring for others are likely to remain in the domain of the human being.  

Being a financial planner has historically been a very human endeavour and our read of this is that the human aspect will prevail.

Both reports suggest to us that robo-advice may not disrupt the financial advice industry like technology has in so many other sectors. 

But there is one nagging doubt on this, and it relates to our previous point regarding value for money. 

A 2016 survey of financial planners in the US highlighted that their number one challenge was to communicate their value-add to clients.   

Our suspicion is that robo-advice has this part nailed, since its main focus is value for money. 

As returns start to drop, the cost to clients will become all the more important and we wonder whether this may create the tailwind that the robo industry needs.   

Ultimately, we suspect this will not be the case and are inclined to agree with the studies we have quoted. 

However, a long enough period of low real returns from investment markets is probably needed as a final proof statement on whether digital advice will eventually become the norm, rather than the exception.

Rory Maguire is managing director of Fundhouse