Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 160

Will roboadvice exterminate traditional advisers?

A concise definition of roboadvice is an online wealth management service that provides automated, algorithm-based portfolio management advice without the use of human financial planners. The question is, will this form of advice become dominant, exterminating traditional financial planners (to use a Dalek analogy)?

The answer is yes, of course, but only when robots take over the world. Between now and becoming slaves to the machines, financial advisers will be greatly assisted by changing technology. But not every planner will benefit. Roboadvice will vastly increase the market size through offering inexpensive advice, but some planners will fail, unable to deal with the ever-increasing pace of technological change.

Winners and losers

Many people lack confidence in managing their money and they will want face-to-face advice, but that does not mean technology will not materially disrupt the industry. Winners will be non-aligned financial planners, planning groups in small superannuation funds, and smaller banks. Losers will include major banks and bank-employed and aligned planners.

While always open to debate, my selection for winners and losers is based on:

  • Ability and willingness of organisations to adopt new technology
  • Burden of legacy systems holding back implementing new technology
  • Restrictions from having a valuable brand - companies who are very protective of their brand are often slow to adopt new technology, waiting for all bugs to be removed
  • Degree of ‘creative destruction’ occurring within the industry - those at risk of losing market share are more likely to look to innovation to remain competitive.

Australian banks have large IT budgets but most of it is spent on maintaining legacy systems or meeting changes in regulations and compliance. When banks do turn their hand to system development, it frequently fails, incurs major cost and time over-runs, and becomes prohibitively expensive.

Major banks are unwilling to risk their brand with start-up technology. A Chief Investment Officer of a very large super fund once told me that systems development now either costs less than $2 million or more than $200 million. There is nothing in between. Smaller start-ups are so nimble and inexpensive that new technology from this source is amazingly cost-effective. But a large organisation is unwilling to risk tarnishing its brand with a small start-up. Major banks are more willing to risk their brand from expensive technology failures so long as the developer is a well-known company.

Major bank wealth management groups risk placing too much reliance on building new platforms. The disruptor to platforms is the predicted increase in open APIs (application programming interfaces). Open APIs will mean:

  • Client investment and personal data can be sourced cheaply and safely. The planner, at almost no cost, can see their client’s position, in almost real time, with data presented in a useful manner with recommendations based on previously-agreed financial objectives and constraints.
  • Fund (and SMSF) administration and tax will be commoditised, driving down price.
  • Planners can execute transactions where they like. Planners will no longer be restricted to what the platform offers.

Bank platforms are yesterday’s technology. My winners are selected because they are organisationally smaller and experiencing some ‘creative destruction’ in their industry.

Size is important. If you are not the lion in the jungle, you better wake up running. Smaller organisations will have to be nimble to survive. Those who do survive, and there will be many who do not, will have an ability to make quick decisions with a high degree of management accountability. They are likely to have less to lose by realising that their historical technology spend has little to no residual value. Cheaper more powerful technology means smaller organisations can quickly develop a technological advantage over larger organisations. A smaller technology spend will not mean less capability. It might mean more.

Younger planners are also big winners with technology, not because their minds are youthful but because they need the business. Younger or new financial planners will see technology as a way of growing their list of clients, including those clients which more established planners thought were uneconomic.

Creative destruction refers to the incessant product and process innovation mechanism by which new production units replace out-dated ones.

The reason Australia is slow to adopt financial technology is the absence of creative destruction in many parts of the industry. Traditionally, superannuation funds do not go out of business because members are attracted to another fund with better products and services. But that is no longer the case. Many small and mid-size superfunds are losing members or are under pressure to merge with larger funds.

These smaller funds must adapt or lose their purpose for being in business. They have to adopt ways to improve member engagement and offer higher quality services at an ever-decreasing cost. They will have to engage with emerging technologies, as they don’t have the budget or capabilities to build their own systems. Their size, rather than being a weakness, will actually make them competitive, offering superior products.

Where are the financial planners?

Financial planners must decide where they are as technology emerges. There are warning signs that they are not prepared for the technology changes, including:

  • Their main browser is Internet Explorer or Safari rather than Chrome or Firefox.
  • They have a fax number on their business card.
  • They have just replaced their server in the office.
  • They have not yet tested or had any experience with a roboadvice product.

Technology is moving to a Netflix / Spotify business model. It can be tested for a very small amount of money. If it works, users can increase the subscription and if it doesn’t, they can terminate the service.

Financial planners must at least experiment with roboadvice and related technology, or they are at risk of not developing the management skills to deal with what will be a material change in the industry.

Conclusion

Technology will only get better. Information will become cheaper and more available. A financial planner will spend materially less time collecting and summarising data and more time with clients discussing important issues. Technology will release them from the cost and limitations of large platforms. Those contractually obliged to use platforms will be at a material cost and flexibility disadvantage.

Size and brand will be a disadvantage. Small flexible organisations will be the winners with more clients, higher margins and providing greater service.

 

Donald Hellyer is the former Global Head of Funds and Insurance at National Australia Bank and Chief Executive of BigFuture.

RELATED ARTICLES

Roboadvice's role in financial advice’s future

Kitces Part 1: How robo misunderstood the advice model

Lessons for roboadvice in Centrelink debacle

banner

Most viewed in recent weeks

10 reasons wealthy homeowners shouldn't receive welfare

The RBA Governor says rising house prices are due to "the design of our taxation and social security systems". The OECD says "the prolonged boom in house prices has inflated the wealth of many pensioners without impacting their pension eligibility." What's your view?

House prices surge but falls are common and coming

We tend to forget that house prices often fall. Direct lending controls are more effective than rate rises because macroprudential limits affect the volume of money for housing leaving business rates untouched.

Survey responses on pension eligibility for wealthy homeowners

The survey drew a fantastic 2,000 responses with over 1,000 comments and polar opposite views on what is good policy. Do most people believe the home should be in the age pension asset test, and what do they say?

100 Aussies: five charts on who earns, pays and owns

Any policy decision needs to recognise who is affected by a change. It pays to check the data on who pays taxes, who owns assets and who earns the income to ensure an equitable and efficient outcome.

Three good comments from the pension asset test article

With articles on the pensions assets test read about 40,000 times, 3,500 survey responses and thousands of comments, there was a lot of great reader participation. A few comments added extra insights.

The sorry saga of housing affordability and ownership

It is hard to think of any area of widespread public concern where the same policies have been pursued for so long, in the face of such incontrovertible evidence that they have failed to achieve their objectives.

Latest Updates

Strategy

$1 billion and counting: how consultants maximise fees

Despite cutbacks in public service staff, we are spending over a billion dollars a year with five consulting firms. There is little public scrutiny on the value for money. How do consultants decide what to charge?

Investment strategies

Two strong themes and companies that will benefit

There are reason to believe inflation will stay under control, and although we may see a slowing in the global economy, two companies will benefit from the themes of 'Stable Compounders' and 'Structural Winners'.

Financial planning

Reducing the $5,300 upfront cost of financial advice

Many financial advisers have left the industry because it costs more to produce advice than is charged as an up-front fee. Advisers are valued by those who use them while the unadvised don’t see the need to pay.

Investment strategies

Slowing global trade not the threat investors fear

Investors ask whether global supply chains were stretched too far and too complex, and following COVID, is globalisation dead? New research suggests the impact on investment returns will not be as great as feared.

Strategy

Many people misunderstand what life expectancy means

Life expectancy numbers are often interpreted as the likely maximum age of a person but that is incorrect. Here are three reasons why the odds are in favor of people outliving life expectancy estimates.

Investment strategies

Wealth doesn’t equal wisdom for 'sophisticated' investors

'Sophisticated investors' can be offered securities without the usual disclosure requirements given to everyday investors, but far more people now qualify than was ever intended. Many are far from sophisticated.

Investment strategies

Is the golden era for active fund managers ending?

Most active fund managers are the beneficiaries of a confluence of favourable events. As future strong returns look challenging, passive is rising and new investors do their own thing, a golden age may be closing.

Sponsors

Alliances

© 2021 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.