,

THE ROBO COMETH

Digital financial advice (or ‘robo-advice’) is disrupting the wealth management industry, and certain major players are already causing a considerable stir. With more and more robo-advisers emerging every day, the key question remains: is robo-advice here to stay?

This article was originally published by The Australian.

Author: John Durrie

Publication: The Australian

A recent PwC report notes the wealth management industry has failed to match the rest of the ­sector in the adoption of digital technology.

This is despite the fact the ­industry serves high net worth ­individuals who have shown themselves very tech savvy.

The Australian Securities & Investments Commission is now ­reviewing the rules around robo-advisers — the new wave of digital technology in action.

There are about 30 robo-advisers in the market in various forms, with one of the more innovative being Macquarie’s Owners Advisory model, which ticks many of the right boxes.

Robo-advisers work in simple terms by your providing a number of answers to show your risk ­tolerance and financial needs, which the computer then mulls and tells you where you should be investing. Owners Advisory works under the catch cry, “we guide, you decide”.

Clients pay $45 a month to be a member, for which they get ­regular publications and access to a statement of advice saying where they should be invested.

The statements cost $55 and go right down to individual stock ­selection. For instance, it might say to maximise your returns you should be buying Rio and selling BHP. It’s then up to you to buy or sell the shares through your ­broker. The fees for service are tax ­deductible.

The banks have not walked down the robo-advice route, instead arguing they are offering ­client advice and concentrating their efforts on providing better tools to provide it.

Ignition Wealth is another model that charges monthly fees based on the level of funds under advice and then offers a transaction service based on cost.

Its service is called digital financial advice and the idea is to offer the advice, divorcing the transaction service from the advice so it doesn’t profit by the level of trades you do.

The seven-year-old company provides white-label service and technology to a range of industry funds including IFS, Care and Hesta, with the idea its technology helps the fund get to know its members personally through the service.

This is smart work for the industry funds because when they inevitably lose award default funds they will survive based on member service.

From ASIC’s perspective, technology doesn’t change the rule that advisers must act in the best interests of a client.

Few computers will have completed the requisite financial ­planning qualifications, so there needs to be suitably qualified ­people driving the machines.

Robo-advice has many advantages in that it can provide an audit trail. But it also needs to be able to raise red flags, so that when grandpa is told to have a flutter on Venezuelan debt products someone knows this wasn’t the best advice to give an 80-year-old who thinks buying BHP is a bit risky.

In August, ASIC will come out with a discussion paper detailing the good and the dangers with robo-advice and give some guidance on just where is it heading with the sector.

In many respects it answers many of ASIC’s concerns about the industry and uses technology in a way that opens the door to better service, so punters can get scaled advice where they need it and leave the generic stock picking to a machine.

This simplicity explains why the banks have not led the market in dealing with a product that could cut them out of lucrative fees income. It also changes the skills set needed by the local stockbroker — another example of digital disruption.

Source: http://www.theaustralian.com.au/business/opinion/john-durie/china-inc-boards-virgin-australia-ahead-of-raising/news-story/f843cae4899f5b35ddc84e8cedaa7c00?login=1