What do horse drawn carriages, cds and landlines have in common? They are all outdated technologies which were once the cornerstone of their industries. With the introduction of the “robo-advisor”, are human financial planners the next outdated technology?

The Financial Advice Spectrum

Financial advice is provided according to a spectrum covering three broad areas; general advice, personal advice, and advice given to sophisticated/wholesale investors.

General financial advice does not take into account your personal circumstances and needs. For instance; an officer at a bank branch may explain the features of a particular investment or insurance product, and may provide help in putting that product in place for you, but they can’t say whether that particular product meets your needs. That would be personal advice, and legislation requires far more consideration.

Personal advice is tailored to you. A financial advisor would recommend a certain strategy or portfolio, whilst considering your individual needs and circumstances, and providing this in a statement of advice.

A sophisticated or wholesale investor on the other hand is considered to have the experience and capacity to fully understand and appreciate the risks of any particular investment. Therefore they require little or no advice.

With FOFA increasing the regulatory burden (and associated costs) on advisors, “Robo-advice” is expected to help with personal advice. It considers an investor’s life stage, income, appetite for investment risk and the amount they are willing to invest through a series of questions. Using complex algorithms, it analyses all the relevant investment options ranging from exchange-traded funds to individual shares, making a personal advice recommendation.

The long term success rate of robo-advisors is hard to measure because they are relatively new, however early indications suggest that robo-advisor constructed portfolios perform on par with portfolios put together by Financial Advisors. The real difference is the cost of the advice. Robo-advisor fees are a fraction of the cost of face-to-face advice, because the portfolio can be constructed without any human intervention. Is this the end?

“Reports of our deaths are greatly exaggerated” – Financial Planners*

As robo-advisors and their algorithms improve, they are likely to become an important player in the personal advice market. However this is not all bad news for advisors and investors. Robo-advisor clients are likely to be Gen Y investors or small time investors with as little as $2,000. These investors do not form a significant part of a typical advisor’s client base because they don’t generate sufficient fees to cover the costs of compliance and support a practice.

If robo-advisors are successful in developing wealth for these low value investors, they may then move onto the books of Financial Advisors as their need for complex advice grows. Essentially robo-adviors could be the tool advisors need to create high value clients to provide a high value service too.

Technology may be disrupting the financial industry but this is not a bad thing. It provides firms with enormous opportunities to transform their business models and the services that they provide to their clients. Sophisticated Access is a part of this wave, using technology to cut costs, and increase the compliance standard for sophisticated investors, providing real value and a better process to these investors.

The end is not here.

It is the Roboginning.

*This quote has been constructed using the author’s creative license.