If robo-advice is the answer, what’s the question?

This discussion is important given the lack of low cost advice solutions available to Australians.

Against a backdrop of compulsory savings, soaring household debt, and complex tax and social security rules, many people are left flailing.

The Quality of Advice Review’s Draft Terms of Reference reveal Treasury’s eagerness to see digital advice solutions fill the “advice gap”. Ironically, it is a gap made wider by ongoing regulatory change driving up costs and subsequently, fees, and significantly depleting adviser numbers.

The US market is proof that there is a place for robo-advice, particularly for younger people and those with low account balances, but there is one fundamental difference between robo-advice and professional advice. That difference will always limit the effectiveness of robo-advice.

Robo-advice v professional advice

It all boils down to the quality of client information.

Professional financial advisers gather and examine large amounts of client information, which informs their advice recommendations.

Robo platforms, on the other hand, generally offer a limited investment service, namely a simple portfolio matched to a client’s risk tolerance based on a relatively short, one-off online survey.

In the United States, where the take up of robo-advice is higher, there is a far greater emphasis on investment-only advice.

However, Australian advisers have worked hard to eradicate the industry’s one dimensional, product selling roots. Their focus is primarily on holistic advice, taking into account a client’s personal circumstances, objectives, and capacity to accept risk.

Detailed data collection and analysis is designed to ensure advisers are fully informed and, in turn, can educate clients about the unique opportunities and challenges they face. Often it exposes requirements and risks clients didn’t even know they had.

An obvious example is life insurance. Many Australians believe they have adequate life insurance through their superannuation fund.

They don’t know they have an insurance need unless it is pointed out to them. Similarly, most people do not realise they have a high-risk estate plan or none at all, until someone asks the right questions.

Certainly, most people don’t understand the rules, limits and opportunities of superannuation and Centrelink.

Successfully coordinating a client’s insurances, debt management, Centrelink, retirement planning, investments and estate planning, alongside aspirations like travel, education funding and a myriad of other competing priorities is all predicated on the information contained in a fact find.

The client fact find is the cornerstone of professional advice.

Professional advisers are able to gather a lot of factual and nuanced information about a client upfront, during the discovery stage.

But while professional advisers have the jump on robo platforms in terms of quality client information, their manual data collection processes look archaic next to the slick, real-time operations of robo platforms.

The majority of advisers still use paper fact finds and forms. Some have moved to an online form akin to a fillable PDF. This is an improvement but clients still can’t independently update their information or interact with their adviser.

While robo-advice is no threat to advisers who have strong, ongoing client relationships, maintaining that relationship advantage hinges on maintaining the information advantage.

Doing so requires a complete, real-time picture of their client’s financial position, circumstances and needs as well as insights about their values, concerns and any past experiences that may influence their attitudes and decision-making.

Anecdotally, there is evidence that the use of a master goals list helps clients to think ahead and avoid making rash short-term decisions.

Ultimately, containing robo platforms to the lower end of the market that professional advisers can’t service profitably, means getting serious about adopting technology that drives client engagement and enables information to be collected, stored, updated and retrieved more efficiently.

Bill Taylor, Chief Operating Officer, iFactFind

Neil Griffiths

Neil is the Deputy Editor of the wealth titles, including ifa and InvestorDaily.

Neil is also the host of the ifa show podcast.