What is digital advice and why should I be interested

Robo-advisor, automated investment adviser, automated investment management, digital investment advice platforms is a catch-all term are pretty much all the same thing. That is,

 

A virtual financial advisor that uses complicated investment algorithms to advise and manage your investment portfolios.

 

You should be interested because as digital advice advances it will increasing impact on investment managers, financial planners, sharebrokers and investment platforms.

 

Put simply, digital advice lowers the cost of providing investment advice and management by replacing the role of humans in the decision making process.

 

Without human involvement, the cost of providing investment advice and management will fall significantly.

 

The USA’s biggest advisory network, Schwab already offers completely automated investment accounts (known as Intelligent Portfolio accounts).

 

The basic account costs between 0.03% and 0.18% depending on asset allocation, with the average fee paid being 0.13%. There is plenty of product and asset allocation alternatives, depending on risk profile.  The minimum investment is only $5,000

 

The premium account offers a lot more including unlimited access to advisors and tax efficient portfolio trades. There is a small establishment fee of $300 and monthly fee of $30 (i.e. $360 per year. The minimum investment is only $50,000.

 

It’s a threat because most Australian services businesses have cost bases that don’t allow them to profitably match these fees.

 

It is only a matter of time, before an Australian business introduces a similar low cost model or an overseas company decides to break into the Australian market with such an attractive offering.

 

It is also a threat because the Federal government sees digital advice as the way to provide affordable financial planning. They are talking about a financial plan costing $300 to $400 dollars.

 

The Quality of Advice review, recommends many changes to legislation in order to encourage financial advisers to return to the industry and to reduce the administrative burden that AFSL holders carry.

 

It’s an opportunity because those who adapt to the new environment quickly will be able to survive and prosper. They will take market from those with their head in the sand.

 

We understand the digital advice space well

 

We were the first provider of automated advice in Australia. That was in 2007. Known as HALO, it produced a comprehensive Statement of Advice (SoA) covering all of ASIC’s requirements, 3 minutes after the potential client completed the online fact find. It was issued as a draft SOA to allow the advise to review the fact find and scrutinize the SOA before finalisation. It also allowed the potential client provide feedback to the human adviser.

 

Digital Advice – generation 1

 

HALO was a first generation digital advice platform. Much of it was rules based. The remainder relied on some complex mathematics.

 

It seems to us that many Australian digital advice platforms are still first generation, and that is still okay for today’s market.

 

Digital Advice – generation 2

 

Generation 2 is already here, mostly in the highly competitive USA market.

 

Generation is notable for its use of Artificial Intelligence (AI). AI is replacing some of the functions of a human adviser and many of the functions of a paraplanner.

 

Investment managers and sharebrokers will be heavily impacted by the automation that AI brings. The impacts will be felt in the front, middle and back offices. For example, there will be little need of investment dealers. The portfolio manager / sharebroker will tell the AI program how they want the order to be executed. This already happening today.

 

Because AI can analyse data much more quickly than humans, sharebrokers, investment managers, platforms will need fewer company analysts, credit analysts and so on.

 

Digital Advice – generation 3

 

As AI develops into generation 3 there will be further reductions in the use of humans to provide financial services.

 

While see an important role for humans, the competition that AI automation brings will force all but the most important roles being made redundant and as a result revenues and costs falling.

 

Digital advice and AI will drive revenues down as those who have reduced their costs, lower their fees in order to win market share and create scale. Scale is vital to profits when the fees fall.

 

Lower market fees will squeeze the margins of those that find themselves unable to lower costs at the same rate as their revenue falls. Without change, they will eventually close down.

 

We think, digital advice and AI will not replace the need for relationships. Personal relationships will still be important. However, personal advice costs a lot more than digital advice, so most people will not be able to afford to use a personal adviser.

 

Further, we don’t see even the third generation of digital advice replacing personal advice when the client’s are complex. For example, taxation matters, business structures, complex wills, family breakdown and so on. People needing those services are going have to pay up to get them.

 

How we can help?

 

There are lots a ways we can help you meet the challenge of digital advice. First, we have to understand your business and your business strategy.

 

After that we can suggest ways to transition to the new environment that the financial services industry is moving towards.

 

We can find for you service providers that will lower your support costs or give you suggestions That change is likely to involve changing the way you operate.

 

These changes will need policies and procedures to support the new way of operating. We can write those for you or adapt existing policies we have in our library of over 300 documents.