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Robo-advice versus the Traditional Model
More and more, robo-advisers are positioning themselves as viable alternatives to real-life, face-to-face traditional financial advice. How do the two compare and what does the future look like for the advice market?
What is robo-advice?
Robo advisers are software platforms that provide investment advice and/or management online with moderate to minimal human intervention. This type of digital financial advice model is based on mathematical rules or algorithms where platforms ask a series of questions to glean information about the client’s desired investment goals, level of risk and results. Robo advisers then use the information provided to design a portfolio.
This is a very different type of financial advice from the traditional model. We personally believe that the human element cannot easily be replaced, and the vast majority of consumers agree. Research by Openwork shows that three-quarters (73%) of people have said they prefer face-to-face advice, despite increases in robo-solutions and the number of advisers innovating within the artificial intelligence sphere. In addition, 71% of respondents also had concerns that robo-advice may not be entirely appropriate for their financial needs.
Finding the Limit
Why is this the case? First of all, there is too much margin for error and a real risk that key gaps in advice are left unfilled when relying on a digital model. Financial advice is so extremely specific to the individual/s involved that it cannot realistically be replicated using machinery unless the individual needs are very straightforward because there are always limitations when using automated options.
Robo advisers use a range of tools to obtain client information including generalised questionnaires but they still miss the dialogue, engagement and thought process necessary for clients to gain the most value from their financial advice. Real-life advisers can make informed investment recommendations, advise clients on risk and provide full transparency on all decisions made, while taking that extra step to fully understand the client or design a tailored strategy. They also offer a supportive service for any questions or concerns raised at any stage of the process. Robo-advice cannot take that extra step; you cannot build a relationship with an algorithm.
Gaining Access to Funds
The key distinction between robo and traditional advice is the difference between generic and holistic advice, but there are also more specific differences.
With face to face options, you retain full control and, broadly speaking, take money out as and when you need. This will depend on the savings and investments methods chosen, but your adviser will have taken time to ensure you understand every element of your portfolio so there should be no nasty surprises when it comes to accessing your funds.
In contrast, those using robo platforms often experience delays when it comes to releasing funds which can be irritating at best and disastrous at worst if, for example, you have an urgent financial commitment. As robo platforms typically have lower entry-level investment starting points and lower-cost investment products, you are also likely to have less choice over how you wish to save and spend your money when taking this route.
Advantages of Robo Advice
Back to Openwork research and we can see that the under-25s are more open to robo-solutions; almost half of those surveyed said that they had no concerns over whether robo-advice would be appropriate for their financial needs. This type of advice will inevitably appeal more to those with simpler financial requirements and a larger appetite for risk for whom retirement is a long way off.
Robo-advice is also usually the cheaper option in comparison to face to face methods, which makes it more likely to appeal to younger people. With low-interest rates making the cost of advice more of a concern when compared to potential returns, we can understand why those with smaller amounts to invest may choose the robo-advice route.
Those advisers that are open to such developments can then tap into this millennial market. By staying with them through their financial lifecycle as they mature and build assets, these clients can become a significant growth opportunity for their chosen wealth and asset management firms.
Disadvantages of Robo advice
Despite the advantages of robo advice, the reality remains that the human aspect cannot be fully replicated by artificial intelligence. There are also ongoing concerns about the fundamentals of the robo market.
It is extremely challenging to fully regulate as the decision-making process behind these platforms is so ambiguous. The industry itself is also unstable with many businesses closing as fast as they opened. These include Investec – who cited lack of take-up as the reason for closing their “Click & Invest” service after just two years – and Tiller, who closed their digital wealth management business and started to return money to investors after an “extensive business review” identified higher growth prospects in other areas of the company.
Elsewhere, an Australian digital advice firm has voluntarily shut down two robo-advice tools after the corporate regulators raised concerns about the quality of advice being generated by the online tools and their ability to effectively monitor the advice.
Many robo-advisers fall short of being fully transparent about their offering and the risks involved. This lack of clarity may leave portfolios subject to conditions with which clients may not feel comfortable. It could typically mean the algorithm rebalances client accounts without regard to market conditions or on a more frequent basis than the client might expect.
While robo-advice platforms are widely believed to continuously monitor client portfolios and identify opportunities, some rely on algorithms that may not effectively address prolonged changes in market conditions. When seeking to gain the optimal experience using robo solutions, we would advise choosing your platform very carefully, taking the time to understand both its limitations and the exact nature of customer protection that it offers.
The Advice Revolution
On the one hand, digital tools may be more convenient and a tempting low-cost alternative to traditional advice, especially for those with limited options. We expect to see positive progress in the fast-moving robo-advice arena thanks to technological advancements which are set to disrupt the industry as we know it. As cognitive computing and “smart machines” develop increased capabilities, including complex reasoning that can enhance human performance, traditional advisers need to stay informed on the latest developments and ahead of the curve.
There is also an identifiable need to make the provision of advice and guidance to the mass market more cost-effective and improve consumer confidence when making financial decisions. Robo-advice could work to plug this gap and disrupt the advice market by providing affordable alternatives and access to investment management advice.
While there is still plenty of progress to be made, certain elements of automated advice inevitably make the overall process more efficient and cost-effective. The good news is that the financial planning industry is also evolving and innovating in a traditional sense to provide investors with more affordable access to advisory services.
At Vintage Wealth Management, we blend our traditional values with a modern outlook, which has allowed us to recognise and take advantage of the best features of robo advice to enhance our client experience. We have invested heavily in technology and advanced software and automated a number of our back-end processes to enhance our traditional advice model.
This offers our clients peace of mind that we operate a consistent workflow where all activity is recorded. It also shows that we are committed to using the best tools available to keep operating costs to a minimum. But until robo-advice meets the quality standards that are required and expected of human advisers, it doesn’t represent a fully viable alternative.
As the industry continues to innovate, it takes time to identify and fully implement the necessary safeguards for optimum investor protection. For now, consumers should focus on face-to-face financial advisers that offer true value for money, peace of mind and all essential safeguards within a company that is open to using automated processes where possible to enhance human performance and minimise the cost to the client. Our team tick all of these boxes and more.