The last decade has seen a number of scandals where people have been given poor advice (or no advice at all, according to ASIC’s report yesterday – Financial advice: fees for no service). When this happens with other professionals like accountants and lawyers, the problem is quarantined to the wrong-doer. However, the adverse publicity around financial advice in the media and in Parliament is contagious and has tarnished the whole financial advice industry.

In addition, it is not uncommon for consumers to complain about the cost of financial advice, which is transparent following FoFA. Most people expect to be given their advice free as part of a broader service or to pay a nominal fee of no more than $500 to $1,500 depending on their circumstances. So, while the world becomes more complex and the future seems more uncertain than normal, the industry should be in a strong position to demonstrate the value of advice. Yet, all the negatives have meant the message is not getting through.

Types of advice

People seek information to guide them in making informed decisions. They don’t segment this into types of advice but the industry is regulated depending on what is provided. It could be information about setting an annual budget, defining types of investments and how they operate or comparisons of mortgage prices. This all falls under general education and people involved in giving assistance in these areas do not need to be licensed as advisers.

This support becomes advice when it is likely to be acted on by the consumer in the selection of classes of products or individual products. ASIC regulates the provision of this advice. If it deals with investment, superannuation or insurance strategies but is unrelated to the individual’s circumstances it is general advice. If it considers at least some of the person’s specific objectives or needs, it is personal advice.

Increasingly, some of this advice, both general and personal, is given electronically as robo-advice. ASIC’s RG 255¹ describes this in some detail.

Robo-advice

Many superannuation funds and financial institutions appear to believe that robo-advice will be the solution to guiding their members. It allows them to control the quality and consistency of the advice and deliver it at a lower cost. This is a reasonable view, but there are a number of challenges in delivering the outcome desired.

Online tools such as retirement calculators will always be a quick and ready reckoner used at a point of time, but, most often, do not lead to activity to purchase or to change strategy. The reason for this is the difficulty in summarising complex issues based on limited data into a simple algorithm – the maths might be accurate but the input often is inadequate.

An example of this is the trend to project superannuation balances and convert them into income during retirement. Actuaries can do the projections but how useful are they given 70% of people will be married at retirement yet the projections are done on one partner alone? Further 80% of people will get a part or full Age Pension during retirement and this will influence the results of any projection, but requires a lot of information beyond just superannuation balances and contributions.

So, robo-advice is only properly useful if the data used is accurate and complete. General advice tools have long been a staple of the superannuation industry and nearly every fund provides calculators on retirement and insurance to their members. Often, these services are seen as a gateway to traditional advisers who improve outcomes by collating data and explaining potential strategies and their financial implications.

The theory is that interested users will come to appreciate the complexity and seek advice or will gain an understanding of their true position (even if incomplete) and seek advice to improve it. However, this follow through usually does not occur and less than a fifth of Australians ever seek personal financial advice.

The issue confronting the financial industry including superannuation is how do we address the advice gap that currently exists across the market?

Evolution of advice

We believe a conceptual change is needed with a stronger customer focus. Users need to be provided with insights relevant to their financial needs and decisions. Simply expecting users to combine the results of a number of general advice tools is impractical and counterproductive. Robo-advice will need to expand beyond simple deterministic outcomes to something more holistic around budgeting and allocation of disposable income.

Consumers will want to know the range of potential outcomes and be able to change their strategy over time.   For example:

• What are the priorities they should have around saving?

• short-term for a holiday
• medium term for a house deposit or paying off their mortgage
• long-term by super contributions.

• How do they factor in coping with future changes in lifestyle (eg having children)

Can they solve these problems without using traditional advice channels?

Simply put, we believe that current calculators are insufficient in terms of the data they use and the outcomes they predict. Further, an advice gap exists with shorter term financial decisions ignored in favour of longer term (retirement) planning.

The tools can definitely be made more useful to consumers without becoming too complicated. They also need to be integrated with and linked to the platforms that advisers use because many consumers will benefit from dealing with an adviser. The architecture must facilitate this; there must be a consistency of outputs; and advisers must be able to build on the explorations carried out by the consumers on their own behalves.

If used in this way, robo-advice will assist advisers to deliver their service more efficiently and the outcomes will be more effective. Our preferred model is not one of replacing people in the advice process. Rather it is one of retaining people for those aspects of advice best delivered by people while using technology for those aspects that consumers can or prefer to do themselves. In this way, we see advice being broadened to cater for the increasing number of complex financial options facing people of all ages.

What does the future look like?

We believe that future advice tools will seek to replicate behaviour of existing financial planners. In fact, the tools will be used by advisers. They will

• model all aspects of a family’s financial circumstances
• be comprehensive across all types of financial products, rather than just focusing on a single product or service
• pre-fill significant amounts of the information required from users – continuously, not just at establishment of the plan
• provide a range of outcomes which can be modified by changing the strategy
• will make suggestions to users based on the real time tracking of member behaviour – for example the system could detect that a user is making additional repayments on their mortgage when they have material credit card debt and provide advice to correct the action.

All the components for a modern advice system are used in the industry and many large superannuation funds have begun to work out how to combine them to deliver a comprehensive advice package to the mass market. The successful ones will evolve by using technology and financial advisers efficiently – and will move away from the pack in delivering value for members.

¹ http://asic.gov.au/regulatory-resources/find-a-document/regulatory-guides/rg-255-providing-digital-financial-product-advice-to-retail-clients/