Take my advice, make friends with a robo
John O'Connell looks at how advisers and robo advice could go hand-in-hand, with the adviser looking after planning while the robo advice takes care of day-to-day execution.
I'm sure by now you've read a lot of ‘is it good?' or ‘is it bad?' stuff about robo advice. This is a bit redundant now.
Automated investment solutions are here to stay, they're not going to go away, so we had better come to terms with it. More than that, it's time to profit from it.
Robo advice, while in its early adoption phase, is well established elsewhere. US robo advisers boast anything from $2 billion (Betterment) to $20 billion (Vanguard) funds under management (FUM).
It's pretty clear that I am going to be on the ‘thumbs up!' side of the debate, but it's not because I am coming from a ‘tear it down, change it up, stir the pot' mindset.
I believe there is a generational opportunity here to lay the foundations for the next 20 years as the financial planning, funds management and associated services grapple with the digital transformation needed that will keep it in step with the changing needs and demands of consumers.
Disruption in its truest sense is much more than fear of change, threats or livelihoods, or cheaper prices. The spirit of real disruption is founded in the demand for cultural and societal change and transformation for consumers, overcoming barriers and blocks to access that open pathways and empower users.
So this isn't about being ‘edgy' and ‘disruptive' for its own sake, putting our hands in the pockets of traditional approaches to business, or even building a cheaper and more cost-effective mouse trap.
It's about how the future could look and how to leverage a considerable upside for advisers.
There are a few key motivators that are driving this change:
- All planners have a core client base and a large tail of ‘would be' clients, if only they could find an efficient means to engage them (the so-called 80 per cent who aren't advised);
- The kids of baby boomers are going to inherit $30 trillion over the next 30 years in North America alone. The ‘Millennials', as they are known, have grown up with digital technology, break up and make up on text, have a different criteria for what constitutes relationships, and are the primary demand drivers for disruption - social media (we remember its inception, but they have never not known it), the share economy (AirBnB, Uber), crowdsourcing (Kickstarter, change.org) to name a few. There's a very good chance that they won't do things the way their folks did - and that presents opportunities for advisers to get agile and reinvigorate its value proposition with the help of robo; and
- Advisers' margins are under pressure. Innovation and demand is asking you to provide services at a lower price, yet at the same time your costs of customer service are naturally high. The high cost of regulation - which protects consumers, price clarity and best interest duties - mean that in order to remain profitable, the industry needs to find new ways to deliver high quality advice.
Robo advice presents advisers with the opportunity to lower the cost of service delivery, build scale in providing high quality, best-interest service and garner greater engagement of consumers to grow the total advice market.
Intertwining robo and planner
Robo advice complements the provision of upstream advice (planning) as an avenue for delivering upon strategy (day-to-day execution).
Robo platforms are not mechanisms of strategy, they can't help you set vision and direction, that's the upstream requirement. But what robo can do is support the decision-making process at the execution level, i.e. what stocks to buy, the funds to invest in, and the level of diversification across sectors and markets in an efficient manner.
With so much of an adviser's time being spent on non-revenue activities, understanding market, product selection and recommendations, there is limited resource available for them to maximise their effectiveness within their sphere of influence, that being, financial advice, retirement planning, self-managed superannuation fund (SMSF) creation - the upstream strategic financial services.
Robo technology takes over much of the, dare we say it, commoditised end: the grunt work of investment; assessing, weighing and balancing products from a potentially global choice set, at a speed and scale previously not available.
In the case of OwnersAdvisory, we review over 30,000 listed and non-listed products in a fraction of the time and cost it takes a human. But that is not to say that the ‘human touch' is now redundant; quite the opposite.
Our portfolio management team is vital to apply the skills of insight and market analysis to set sector tilts as markets are dynamic things.
Portfolio managers are the rock stars of robo advice. They are a synthesis of market analyst, professional adviser and maths super geek, and it is their skill and input that creates the rules that will ultimately shape the substance of investment advice, based on your specific portfolio, risk profile and current market conditions.
Just like our portfolio managers, consumers still need financial planners and advisers to help them identify needs, set goals and create investment strategy approach. By leveraging the power that robo advice now makes available to you, you can free up your time for planning, SMSF setups, building your client, business and revenue base.
Robo advisers now provide a means for you to extend your service offering, build greater value and speed to market for your services, lower the cost of providing your services, and build loyalty through providing high quality, professional-grade advice.
Now, there are many providers of automated advice, and each one offers its own take on what is still a very new and enormous opportunity. You should complete your own investigations to understand the best fit for your business model.
But you should not feel threatened. When you look at robo advice through a different lens, you begin to see how technology can serve both the needs of the upstream providers of financial advice - by protecting their client relationships through reinvigorating their value propositions - and meeting customer needs by delivering professional-grade advice that is dispassionate, reasoned without favour and cost effective.
That's got to be good for business.
John O'Connell is the chief investment officer at Macquarie Banking & Financial Services, and founder of OwnersAdvisory.
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