The rise of the machines may not be the best interest of the general public after all
In recent years there has been a lot of attention given to robo advice and the changing face of financial advice. But what is it all about and how did we get here?
Gone are the days where an adviser could provide low cost “templated” advice to clients that suited their needs. The increase of compliance requirements, legislation changes and the complexity of financial products are increasing each year. This means that good advice slowly slips away from the “lower end” of the market who are unable to afford the sometimes significant fees to get good quality advice and implement and maintain this for them.
This opened a space in the market for “direct insurance” yes that stuff you see on midday TV that promises easy cover with no medicals etc. Without going into detail, these type products tend to have a very significant decline rate when it comes to actually paying out. This is quite simply because the insurer will ask questions at time of claim, rather than upfront, this provides a much greater scope to decline based on “non disclosure” among other things.
This has all lead to significant investment by many major financial institutions into how to systematically approach the advice process and how to “automate” this in an effort to provide good advice that doesn't involve a face to face fact finding process with a skilled and qualified adviser. This will become more and more prevalent in the coming years as these systems get introduced to the general public, one would assume this would start at the banking level and grow outward.
BUT MACHINES ARE SO ACCURATE, HOW CAN A SYSTEMATIC APPROACH BE A BAD THING?
The trouble with even the most intuitive technologies is that they are only as good as the information that is put into them. Until we reach the singularity any system is going to interpret information that is entered into it in a logical manner to produce a logical result. So what is the problem with that? logic is good right? Here are a couple of dilemmas that these systems are yet to overcome (in my, and many others, opinion).
PEOPLE ARE INDIVIDUALS
How one person understands a question on a screen and produces an answer is often vastly different from the next. A classic example of this is one of risk in investments. When asked the question “On a scale of 1-5, 1 being pure cash with almost no risk and 5 being high risk speculative investments, where would you like to invest your money?” Most often when this direct question is asked an investor will tend to the more conservative 2-3 value, this happens regardless of age. The reality is this question is directly linked to asset allocation and, over a 30 something year period, returns of “low risk” portfolios are greatly outperformed by “high risk” portfolios, with a negligible increase in risk. As the time frame gets shorter, this risk increases. As an adviser I have found that in most cases an investor will give a completely different answer after this concept is clarified to them.
It is reasonable to assume that unless time is taken to understand this concept the average robo advice consumer would just click “next” without giving it a second thought. The impact of being low risk in a 30 year Superannuation investment could mean the difference in paying off your mortgage in retirement or having to downsize. Many people don't realise this until the time to act has long passed. I highly doubt that a popup on your screen will carry the weight that it should.
PRODUCT PROVIDERS WANT YOUR BUSINESS
Any investment, insurance or superannuation account you open is essentially a “product” and in a competitive marketplace everyone works to get as great a share of the marketplace as possible and will do anything to get it. While lowering prices and adding benefits is a great place to start there are much easier ways to do this.
No product provider is going to tell you what they are NOT good at. As a seasoned adviser I have worked with a wide spread of products and the actual employees of those companies. One year a provider can be efficient to work with and offer a great product and, just 6 short months later, be having major administrative issues after losing key employees or implementing new systems etc. More often than not, these kind of concerns are not publicised, people just stop using them.
For some time now, professionals have been using “research providers” that provide a rating of one provider against the next given specific criteria. This is a great place to start as you want to ensure that you are providing the best possible option for your client and it is very difficult to scour through and compare every PDS for a few dozen providers each time they are updated, sometimes a few times a year. Great right? Well sort of.
It is possible for a provider to add benefits that are of no or very little benefit to the consumer in an effort to “fool” these rating systems. As an example, it might be a point of differentiation that an insurance product provides an increased cover for smallpox victims it is essentially moot point, as this is extremely rare in modern times and due to immunisation has not seen a case since 1977, other than bioterrorism which would be excluded as an “act of war” it is hard to see how this might be a tangible benefit, though a system adding up bullet points might see it as one.
THE QUESTION IS “DOES A PIECE OF SOFTWARE HAVE MY BEST INTERESTS IN MIND?”
There are of course times where an efficient service, to provide a consumer who is aware of all the options and wants a low cost solution, is called for and Robo Advice would be ideal in catering for this. Advisers look forward to the development of any systems that can help us to provide good advice to consumers at lower cost. That said, it is always important to ensure that a human element guides this process.
We believe that it is going to be quite some time until we see the death of advisers such as myself providing good advice that is in the best interest of the client. In the vast majority of cases when a person seeks advice they do so with their life savings in mind and the cost of seeing professional is minimal when compared with the downside of losing what they have worked so hard to build.
23 November 2016