Robo-advice is coming

It was the late US President John F Kennedy who famously said: “Change is the law of life. And those who look only to the past or present are certain to miss the future.”

Those words, which continue to ring true more than half a century after he uttered them in the early 1960s, should be remembered by anyone who doesn’t believe robo-advice will mean seismic change for our industry.

Just think about similar service industries.

Travel agents have had to redesign their business models quickly in the wake of online hotel and flight bookings; finding value-add has never been more important.

So, too, for stockbrokers with the advent of online broking services such as CommSec and E*Trade. Research, access to IPOs, market intelligence; these are all essentials add-ons for traditional brokers fighting to survive in an online era.
It happened in those industries, almost overnight. Now financial planning – and funds management – will need to come to grips with the revolutionary change that robo-advice represents.

In the early days of any significant change, teething problems offer false hope to those clinging to the past. But as the US is demonstrating, as the IT improves so does the appeal of robo-advice.

The other false dawn was the age factor, the notion that this type of advice would appeal only to the young who, almost by definition, are asset-poor at this stage in their life cycle.

Wrong. A new report on robo-advice by the financial services consultancies FinDigital and Ignition finds the fastest -growing constituency globally are those 60-plus. It gives a whole new meaning to the cliche that 60 is the new 40.

The report says that although robo-advice obviously appeals to the IT-savvy younger person, those transitioning to retirement or with their feet up already also find it appealing for what it offers in terms of transparency, control, lower fees, flexibility and, in what should send a chill down the spine of every adviser, better customer experience.

When these findings are coupled with Australia’s self-managed super fund sector – boasting more than a million trustees and members who have already implicitly declared their willingness to make their own financial decisions – then the ramifications for advisers are potentially even more dire.

The simple fact is people are becoming more comfortable with providing information to a computer, especially when the payoff is instant access to their financial position, 24/7.

This is what people expect now, with recent surveys showing they prefer to have instant access and control over their own financial situation than having face-to-face dealings with an adviser.

I suspect the Global Financial Crisis had much to do with this; it made people sceptical of advice and far more prepared to back their own judgement. It meant the next logical step, robo-style advice, was not going to be hard to swallow.

That said, robo-advice does not need to spell the end of the adviser; there are still stockbrokers and travel agents who have adapted their services to make a good living.

Tougher – but still good. Some people will still prefer face-to-face interaction and there will be situations where robo-advice won’t suffice. But make no mistake; it will change the industry.

Funds managers, too, won’t be immune, especially if the US is any indication (and it usually is). Many robo-advice services have concentrated on baskets of ETFs, weakening the demand for managed funds, and I expect this trend to occur in Australia.

Advisers will need to think how they can incorporate robo-advice into their business – whether to generate new leads or to look after clients who would be unprofitable otherwise – similar to the way many stockbrokers now offer online access to their clients.

It will not be easy. For small advisers the capital cost involved in developing the software could be prohibitive. At the very, least the major vertically integrated groups will have a clear advantage. Once again the small end of town will have to move quickly to find a competitive edge.

George Lucas is managing director of Instreet Investment Limited. He has over 24 years' experience in the investment banking and funds management industries specialising in developing, managing and structuring financial products. He was previously a director of two listed investment trusts, chief investment officer at Mariner Financial, and a senior equities derivatives trader with Citibank and First Chicago in London.