by Tony Vidler
Apparently a fair proportion of advisers still do not believe that robo-advice will have a serious impact upon their business. It will of course, and in many respects it is helping advisers to be better at what they do…giving advice.
The term “robo-advice” creates an image immediately of a machine replacing the human, and there is little doubt that most advisers see themselves primarily as being in the “relationship business”, so struggle to accept that a machine will be able to replicate the nuances and intuitive aspects of human interaction. That line of thinking ignores the fairly rapid development of Artificial Intelligence (AI) and it’s potential impact in years to come, which could be significant. However AI is not the same issue as current robo-advice models, and advisers underestimate the probable impact and potential benefits of todays robo-advice on their businesses.
There trends coalescing that are leading inevitably to consumers turning to robo-advisers instead of individual humans for a fair range of traditional financial services products and solutions. These include:
If we change the terminology from “robo-adviser” so that we can do away with erroneous impressions of a machine replacing a human, and use “do-it-yourself” (DIY) instead, it becomes easier to see how these trends connect, and the danger (and opportunities) they pose to traditional advisory business models and offerings.
We only need to look at other industries to see the impact of those very same trends. An odd one to use as an example for financial services would be the “building industry”, yet I can look at the local market as a perfect illustration of the disruptive effect of these same trends.
In the last few years rapidly increasing house prices driven by supply shortage in the main centres together with greater regulation and compliance costs for builders has resulted in serious price escalation, not helped by the labour and materials cost rising far more rapidly than official inflation rates suggest they should. It is not uncommon to hear stories of tradespeople earning the same hourly rate as lawyers now. This gives rise to an affordability issue for many ordinary consumers, who have at the same time been subject to restrained wage growth in real terms – so the average home purchaser has experienced cashflow squeeze.
Technology advances during the same period have resulted in fantastic power tools and appliances being readily available, and relatively cheap in real terms. Alternative building materials have been created with the home handyman in mind – lightweight yet durable, and partially readymade for the home handyman to instal after unloading from their trailer – which was provided by the hardware store on a complementary basis for the consumer.
The hardware stores have invested in developing high quality educational content which is delivered free via mobile apps and 24/7 online access to potential customers. Video’s, checklists, how-to-guides…all showing the consumers how to instal that new kitchen joinery themselves, or how to build a back deck, or how to do just about anything under the sun really. The very stuff that you used to have to call a tradesman to do.
So now the hardware stores have stuff which is easier for the consumers to move, use and instal – and they often provide the means for the consumer to do all of those things alongside selling the actual raw materials themselves – including roof trusses, framing and so on. They provide financing to ease the cashflow impact. They provide guarantees for product performance – and “de-risk” the consumers DIY experiment. They educate and empower the consumer to try DIY…or at least DIY part of the building process.
Do you think this has had an impact on the building industry and its’ tradespeople?
You bet your life it has.
We – the financial advice industry – would be foolish to believe that empowered and better educated consumers with rapid, cheap & direct access to simple solutions won’t use them.
Institutions are providing educational content that encourages and empowers consumers to do some things for themselves, such as starting a savings plan or doing their own retirement planning analysis and planning using a mobile app. Those same institutions can provide consumer comfort and security in the form of guarantees, which they largely self-fund from their multi-billion dollar per year profits. Guarantees that no adviser practice can ever compete with….so where does an average consumer feel there is less risk?
Institutions can deliver scaled, or templated, portfolio’s and insurance and tax solutions that will work well for many consumers. It is the financial services version of “the kitset kitchen joinery” – just choose your colour and away you go. Or in our case, just choose your investment fund to match your risk profile and away you go.
This can all be done by customers on their phones and tablets too. In fact, they can be linked to the customers mobile banking app, creating even more consumer convenience. It is the financial services equivalent of “providing the complementary trailer” for the consumer to take the goodies home.
The volume attainable for institutions with their reach and influence, combined with the diminishing acquisition cost per customer, results in the ability to deliver financial products and solutions at far cheaper prices than any human running a boutique and independent business can ever match.
Robo-advice is already having an impact on traditional advice businesses. Consumers doing DIY financial planning….consumers doing DIY insurance product purchasing online….consumers doing DIY business accounting….these are all “robo’s” successfully moving into the traditional advice space. Robo-advice is a genuine alternative for many traditional advice or product lines as far as consumers are concerned. It is a real opportunity for institutions with existing scale and infrastructure, mountains of customer data, and relatively poor historic cross-selling rates into their client bases. It is a massive opportunity for them, and introduces simplicity, lower costs and higher convenience for consumers.
There is a huge area of opportunity for advisers in amongst this though: concentrate on providing actual advice and strategy. To stretch the anlogy one step further; the hardware retailers do not go anywhere near trying to provide bespoke architectural design services. Too costly for them to do so given the intensely personal planning element requiring highly trained and very expensive individual advisers….like the financial services world I suggest.
The robo models can and will deliver transactions and pre-packaged solutions better, faster and more cheaply than individual advisers ever will be able to. What they cannot deliver cheaply, rapidly or better is the personal understanding of what clients are trying to articulate….the things they think and aspire to, but don’t necessarily say out loud. One of the greatest skills that advisers develop rapidly in their careers is the ability to interpret what clients are trying to say, or understanding what really matters to a client from body language and communication style and moods. It is this ability to interpret the things that algorithms and computer systems cannot detect – but human beings can – which provides the area of opportunity for advisers.
Focus on understanding clients and being able to interpret their language and meaning, and then concentrate on advising them on how to achieve their objectives. Artificial Intelligence might challenge us in that space one day in the distant future, but in the meantime no off-the-shelf product or robo-advice solution will ever be able to do that.
In shifting the focus from product sales and solutions to understanding human beings and advising them at the deepest and most personal levels on how to achieve their individual aspirations, financial advisers have opportunity and hope.