Robo-advice: the future is now
While we know that robo-advice is here to stay, who is actually using it? There has been much debate and discussion about user demographics; both those of today and those in the future.
While it is easy to speculate that it must be the digital-savvy generations and those comfortable with online transacting, it would be foolish to ignore huge swathes of the population as potential non-users, whether they be baby boomers reaching retirement age or the “already-retired” looking for urgent help and solutions.
New reports and research not only shed light on the changing comfort levels of the nation when it comes to robo-advice, but they also confirm that robo-advice has appeal to groups that might have been dismissed by the financial advisory sector only a few years ago.
Who should the sector target?
Millennials is predictably the first generation that rolls off the tongue. However, the age range in this group is significant. Younger millennials are coping with debt and financial survival issues, while the upper-end of the group is exploring savings, pension options and general wealth planning.
Wealth Wizards, the UK’s first online independent financial adviser, reports that users of its online Pension Wizard are typically between 25-45, the majority being in the 30 year-old age range, confirming that the older millennials are seeking out online financial advisory solutions.
Roger Portnoy, in his latest report “The Evolution of Digital Financial Advice 2018”, states that “25-45 year olds will be much more inclined to develop a financial relationship with firms that start to embrace some aspects of the digital advisory model”. Portnoy goes on to highlight that this generation will be more inclined to provide trusted partners with electronic access to their data, and will welcome the presence of digital solutions that can steer them toward financial well-being, core asset accumulation and a healthy balance sheet aligned with their personal situation. He goes on to suggest that this group will want to interact with both intelligent digital assistance and also human advice, especially if it is offered within an on-demand model and aligned to deal with complex or critical life events.
Other research backs this up; 64% of millennials (born 1983-2000) say they prefer hybrid investment advice over either a dedicated human adviser or conventional robo-advisory services, according to Accenture.
However, the sector should avoid myopia when it comes to defining one target group for robo-advice. Low-hanging fruit is close at hand with those approaching retirement and in the earlier stages of retirement. Digital advice is increasingly attractive to these groups; whether they are high net worth individuals or lower net worth individuals normally overlooked by the traditional financial adviser.
A recent survey by MyPrivateBanking among 600 high net-worth individuals (HNWIs) in the US and UK found that more than 70% of respondents think online and automated investment tools can positively affect their wealth manager’s advice and decision-making. The research also found that adoption of robo-advisers is happening more quickly in the high-net-worth segment with 43% using online management tools vs 17% of the mass market.
Combine this with the fast-pace of adoption of digital resources amongst baby boomers in general and you have a seemingly captive audience for robo-advice; a Hearts & Wallets survey discovered that, among people 53 to 64, usage of digital resources jumped 8% from a year ago to 50% with 30% of retirees now using digital resources.
Access and affordability is what appeals to this group. Not everyone can afford a face-to-face adviser, and that’s where robo-advisers seem to provide the opportunity for both advice firms and their clients. “Digital advice can also provide a tool to re-engage with dormant clients,” says Portnoy. His previous research shows that 1/8 become fully disengaged with their financial adviser and a further 4/8 do not appear to utilise financial advice on a regular basis. According to Portnoy, these are prime targets for a robo-advice solution to re-engage them with their savings and retirement goals.
What can the industry do?
Business Intelligence predicts that, within the next several years, virtually all investing is going to be at least partially automated and that robo-advisers will manage approximately 10% of all worldwide assets under management (AUM) by 2020 equating to approximately $8 trillion.
With a prize on the horizon such as this, financial advisory firms will need to share the responsibility of building, developing and nurturing this future generation of investors that are demanding automated solutions; whether a hybrid advice platform or a full machine learning advice platform.
Together, the sector must ensure that robo-advice is a trusted medium providing access to financial advice for millions while enabling human advisers to focus on the “human side”, more complex cases and new business. We’re not talking 50 or even 15 years away; we are looking at significant shifts and changes within the next five years.
Portnoy’s report echoes this reality: “in five years’ time, there will be few adults in the UK who haven’t come into contact with robo-advice, whether that’s an online interaction or speaking to an adviser who is supported by some form of automated advice software”.
- Engender trust
Robo-advice is only as good as the data it can utilise.
It is therefore essential that a symbiotic relationship is created between clients, their adviser and robo-adviser in order to deliver a more accurate set of recommendations or analysis, and to ultimately support the advancement of automated advice in the future. To do this, clients will need to exist in an environment where sharing of data, within strict data protection and privacy regimes, is the norm.
Continued use of social media and the advent of Open Banking, with the arrival of API solutions that promote a level of data sharing not seen before, will certainly help to boost the confidence of the nation. In particular, we will see younger generations more willing to share information with trusted third parties than the older generations based on a history of sharing their personal data across mediums such as Facebook, Amazon, Google, Instagram and so on.
For those who are not so confident, they will require a different approach. According to Charlie Nunn, HSBC’s global head of wealth management, “to increase trust in robo-advisers it will be necessary to communicate the advantages they bring”. This requires the industry to play a significant role in reassuring the public about security and privacy concerns while highlighting the benefits.
HSBC identifies seven key benefits of robo-advice that should be promoted including: the benefit of multiple experts, low cost, friendly user experience, frequent upgrades, real time information, rebalancing and the ability to work alongside humans.
There is no doubt that security will be an on-going issue, but demonstrating that the client is in control through explicit permissions will help to generate trust alongside larger sector-wide security initiatives.
Robo-advice isn’t just about accessing financial advice online, it’s about the processes behind the scenes that people don’t see to democratise advice by making it scalable, cheaper, more compliant, consistent and robust.
I believe the sector must not only focus its messaging on the power of robo-advice to support millions in planning their financial futures, but also demonstrate that it is a learning tool helping clients understand more about the management of their own finances and ensuring they are more savvy and engaged in the longer-term.
In the words of The Borg in Star Trek, “resistance is futile”. In just the past 12 months, we have seen considerable advancements in robo-advice in the financial advisory sector, from new product introductions to the announcement of new partnerships between the fintech and industry stalwarts.
To remain competitive, firms and the sector must now collaborate and ensure that existing, lapsed and future clients are aware of the benefits of robo-advice and that any potential issues are mitigated. In this way, the sector will benefit by attracting a new, broader client base that will deliver additional margins allowing firms to continue to provide quality and relevant advice.
By Simon Binney, business development director at Wealth Wizards