Robo-advice is coming and financial advisers need to be ready. But what is it and how will it affect the their businesses?
There is no agreed definition for the term robo-advice. However, in a financial advice sense, it seems to be generally accepted that it is a system of automatic asset allocation. A computer program, rather than a human, recommends asset selection. This could perhaps be based on a risk-profiling questionnaire.
A more robust computer-based fact finder could determine a person’s current position and their goals and objectives. A savvy financial planning/computer programming team could develop algorithms to use those answers to formulate not just asset allocation, but strategy advice. This could be updated automatically on a regular basis to ensure the currency of the advice.
So… to advisers who think their big value proposition is selecting assets and telling investors they need to run a transition to retirement (TTR) strategy, I have bad news for you. Your job could be in serious jeopardy. But for those who add greater value and form significant interpersonal bonds with your clients, you have nothing to worry about it.
For many years in Australia, advisers have recommended managed funds. These funds have been vetted by research houses. AFSL investment committees may have even set model portfolios of these funds. So most advisers haven’t really been doing selecting assets for their clients anyway. Furthermore, platforms have offered features such as auto-rebalancing. What percentage of clients care about any of this? How many clients sought out a financial adviser because they were excited about auto-rebalancing and asset selection?
Let’s take it a step further. Half the strategies used by financial advisers could be gleaned from the Sunday newspapers. People aged 55-64 probably need a TTR. People aged 30-55 probably need some life insurance. If you have 40 years to retirement, you can probably tolerate some volatility in your portfolio. This is not brain surgery.
Modern financial advisers cannot afford to base their value proposition on advice. Advice is easy. A computer can now give advice. However, no matter how brilliant that advice is, it is worthless if it is not followed.
What am I talking about? Simple. Robo-adviser recommends a great strategy/portfolio for Client. Client executes plan as written. Everything is great for a while. Markets dip. The wheels come off the cart. Client gets the jitters, abandons the plan and sells down the portfolio for a loss.
My point? Great financial advisers add tremendous value by educating and coaching their clients and are there for their clients, come what may. They will never be replaced by robots. Because when making some of the most critical decisions of their lives, most people would rather deal with their trusted adviser – not a robot.
