I am increasingly finding the world has divided into two camps: those who do and the rest who don’t ‘get’ the emerging world of digital advice automation. It is not surprising to me that many in our industry have either baulked at the opportunity to digitise their practice, are waiting for the right holistic offer to soon become available, or are sitting on their hands to see how this new digital thing pans out.
Either that or many are overwhelmed by the array of vendor choices and a wide divergence of meaning around ambiguous terms like ‘robo advice’ or the trumpeted ‘fintech revolution’ in financial services.
So as a non-adviser who co-founded an award-winning financial advisory firm and is building a digital holistic advice offer from the ground up to improve the client service experience, let me offer the following ‘digital advice 101’ building blocks.
Let’s start with ‘digital automated advice’ tools.
Digital automated advice can be a pure digital experience, whereby there is no human interaction. Or it can be an adviser-led digital experience, with human interaction.
Most direct-to-consumer offerings are actually ‘automated investment services’, driven by calculators or algorithms to obtain a recommended investment portfolio based on basic profile and risk tolerance questions. The portfolios are composed mostly of low-cost exchange traded funds, periodic rebalancing, and dividend reinvestment among their example features.
ASIC’s proposed approach to the regulation of digital financial advice in Australia will mean rigorous (human) compliance and testing of these algorithms.
If there is a problem, it may result in poor advice to a large pool of clients. Providers must have a compliant responsible manager, high quality and frequent reviews and meet the best interests of the client.
Technology has definitely delivered the capacity to automate the investing part of the advice equation, sure. But are we at a fully automated level yet? Not really.
That is because a lot of human behavioural elements are too complex to replicate by a machine. Think here about the brain’s decision-making capability around unknown and known probabilities, including ambiguity, aversion, time, knowledge, beliefs and external influences.
Some form of human intervention is needed as there is no application behaviour algorithm that can execute this function of investing.
So this covers ‘digital automated investing’. But what about the fuller context of ‘advice strategies’, covering not just investing but more holistic client needs?
Digital automated advice tools support advisers to have rich conversations with clients around wealth management and the advice journey process with a client. Think here of the tools - not just static calculators - that help to simulate real-life situations, goals, objectives and 'what if' scenarios, illustrating how certain decisions will impact a client’s wealth accumulation through to their retirement.
The advantage to this is that advisers are educating clients along the way – making reasonably complex subject matter simple and relatable via a communication system based on how a client learns as an individual.
Every adviser, through the ‘know your client rule’ knows that each person has individual and changing goals. Digital technology, data and sophisticated nonlinear algorithms are now enabling us to model any number of client goals, asset classes, products, risk, investment and retirement strategies, simulated in any mix of economic variables, regulatory, environmental and behavioural rules.
Technology is making complex advice strategies much easier for an adviser to explain and equally easy for a client to interpret, understand and apply it to their real-life.
Technology is also automating how a client uses and manages their cash-flow, which is core to any advice strategy. Being able to auto-categorise income and expenses, amalgamate bank accounts into one place and project future cash flows helps clients track to their savings and spending goals.
My advice is to ignore the hype you may hear. This is where digital automated advice is positioned today, and there’s no need to wait for a ‘revolution’ to occur to start using it to your clients’ best advantage.
Read more on financial advice automation.