I have been watching the rise of the robo-advisers for about 18 months or so. Only over the last 3 months have I seen that word come up in articles and conversations in Australia.
Yet, in places such as the UK and US, a number of start-up robo-advisors have made a dent in the industry and are starting to put some pressure. The incumbent response is generally that of either dismissal and denial. A few rare ones e.g. Charles Swabs, see this as a new market opportunity and have embraced the concept. They cleverly created their own robo-adviser and fenced it just enough so it doesn’t cannibalise their traditional market. This is where I personally see the opportunities lie.
I attended the advisors Innovation conference; this was my first and I wasn’t sure what to expect. From the agenda, however, I could tell that the advisors community is hungry for some tech in order to keep up with customers’ demands and expectations as well as lower their cost and modernise their operations.
The registration to the event was so popular that the organisers had to relocate it to a larger venue. During that day, robo-advisors were mentioned frequently by speakers as well as the audience.
However, I observed a general consensus from the audience: generally speaking, robo-advisers were not seen as a thread but more as a fad as most advisers would say they focus on high net worth individuals, therefore a different market. This was despite the repeated efforts from presenters to raise not only awareness but create a sense of urgency that the wolves had passed the gate and were now heading in fast.
While I appreciate that there is a multi-tiered market and the appeal of focusing on high net worth individuals, I also believe there are significant opportunities in the medium and low end of the market for those who have found a way to provide quality advice at low cost.
Are robo-advisors really a threat and enemy?
I take the pragmatic view when looking at robo-advisors and see them as a frenemy. The reality is that they are here, available, and their numbers will grow. I also believe that they can bring to the consumers access to investments capabilities at a low cost, convenient (web based, so anywhere any time), and with little engagement or effort and will appeal to a number of people, and not just the gen Y or millennials. Robo-advisors could be the answer for that medium and low end of the market.
In Australia specifically, it’s fair to say that consumers have lost faith in the financial advice area. Too many horror stories of people losing most of their savings have been heard. The consumers are finally realising that if the advice is free then it’s quite likely that the advice might be biased; yet, we in our naive minds, still expect to get personalised, unbiased advice for free. How are advisers expected to make a living then if not from the commissions of the products they sell?
So here may lay the source of the problem some thought, hence the report recommending significant changes in advisors remunerations.
In the midst of those battles and debates, no wonder robo-advisors are becoming an attractive alternative not only as a business model (low cost sales) but also to the consumers: low or no fees, simple process, few options clearly laid out. All done online and without having to interact with another human-being.
I am also of the belief that a robo-advisor should be one of the options a financial advisor firm should offer. Why? Because of the customer’s journey and lifecycle. I look at a robo-advisor as an incubator to a long-term relationship between the client and the advisor. While someone might start online with a small investment at low or no cost; overtime that person’s need will change based on different life events at which point they will most likely need to reach out to someone for some face to face advice. Wouldn’t that be easier if they could start with an online chat and then book an appointment with the same firm who’s managed their investment for a while now?
Robo-advisors are essentially one form of sales channel suitable to some specific persona; with the use of suitable technology and analytics to detect the triggers, the client’s journey can take them from one engagement model to another seamlessly, whenever the time is right.
The challenge might be in selecting the suitable technology. Any “pre-fabricated” robo-advisor platform would most likely only provide similar outcomes and customer experience no matter what the brand is; which would make the ability to differentiate somewhat difficult.
To differentiate, the platform has to have significant breadth and depth of capabilities to allow the organisation to “program” its DNA and “secret sauce”; yet, it must be user-friendly enough to allow the business users to change and tune that “secret sauce” as the market demands evolve constantly. This is where I foresee the downfall of a number of robo-advisors platforms. It is quite likely that a lot of the “smarts” are deeply ingrained in the application and would require programmers to make changes. The other limitation, for those operating independently from main stream financial advisors, is that they only focus on a few persona and won’t have the means to cater for the needs of people when those change over their life cycle. This, most likely, will make the use of those robo-advisors as a tactical decision by consumers.
There is no doubt that times are changing fast in the financial advisors sector and that disruptions are only just starting. The pro-active ones will embrace it early and leverage technology to their advantage, even if only for a short while; but the smarter ones will pick carefully the right technology partners to architect together a unique platform that will not only give them the agility and velocity needed to meet an increasingly fast and demanding consumer but also one that leverage their own industry expertise to guide their clients throughout their life journey. Those I believe will be the clear winners.