Robo-advice: plenty of promise in the idea, but no threat to full-service advice

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By Craig McCulloch | 12 May 2015

Online technology has been used to disrupt dozens of industries in recent times and there’s no shortage of companies willing to bet that financial advice is next in line.

US-based automated investment adviser Wealthfront, which charges just 0.25 per cent on its portfolios, has quickly amassed more than $US1.5 billion in assets while Charles Schwab and Co plans to launch its own robo-advisory arm early next year.

UK-based robo-adviser Nutmeg is also finding a ready audience of investors. More than 35,000 investors have filled in their online questionnaire, which produces a recommendation to invest in a portfolio which matches the investor’s risk profile.

It’s a different story in Australia where the broader advice industry is dotted with a limited number of simple scaled advice solutions but the robo-advice movement remains in its infancy.

It is not being held back by technology. The technology and algorithms required to create optimised portfolios are easily implemented, and the more complex calculations needed to develop holistic advice plans are already being used.

But there are also crucial caveats to the quality of that advice which no robo-advisory company, overseas or in Australia, has found a way to completely overcome.

Effective, comprehensive

Any set of advice recommendations are only as good as the information they’re based on. Can effective, comprehensive advice be created based on a 10-minute online questionnaire, which is necessarily limited in scope?

Just as importantly, will a prospective investor approach the questionnaire truthfully and actually get to the end? There’s a reason the most popular social websites in the world are constructed simply. Take a look at sites like Google, Facebook or Twitter: they generally have one small box you fill in.

They require simple inputs to solve simple problems while financial planning advice requires complex inputs to solve a complex set of life and financial goals.

The fact that most people only fill in their annual tax return – a task which requires significant, complex information – under threat of being fined (or will pay an accountant to complete it rather than venture online) – suggests just how difficult it is to extract this type of information from people.

Robo-advice just can’t replace the very human and emotional interaction dynamic that is required to deliver good advice. It requires tough conversations to find out a client’s true financial position, goals, needs and wants, let alone their attitude to money and what it represents in their life.

Concerns among investors

While US-based robo-advisers are gaining traction, a recent survey of US investors revealed similar concerns among investors. Just one in three said they were “very comfortable” using online or mobile financial advice technology according to a Wells Fargo/Gallup survey in June-July 2014.

Most investors still showed a preference to speak to a dedicated personal adviser or even an adviser in a call center as opposed to relying on robo-advisers.

However, the report also pointed out that it doesn’t have to be an either-or situation: financial advisers are often tapping into the same analysis tools being offered to consumers online.

If implemented well, robo-advice can supplement the traditional advice process although the relationships between simple scaled advice, robo-advice, and fully-fledged holistic advice, remain blurred.

While robo-advice has a place in the industry, existing financial planning relationships aren’t likely to be in the robo-advice targets any time soon.

This article was first published in Professional Planner.