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.