14 Feb Robo-advice: the real deal or another fad?
Technology has found a place in every home today. Our children use devices to learn, play and communicate. Our phones are no longer just for making calls and pack more technology and capabilities than expensive super-computers of the last decade.
Reminiscent of the future predicted in movies such as i-Robot, the future of many of our roles is now being tested by technological advancements. The role of financial adviser is no different, and the latest offer for financial assistance is known as robo-advice.
Let’s explore the available robo-advice services now touted as the cheap replacement for financial advice with our Financial Adviser, Chris Kelly.
What is robo-advice?
Robo-advice is the provision of investment advice based on an algorithm. This assisted service has a number of potential benefits available for those seeking a review of their investments or direction on investing their cash savings or superannuation. All this can be arranged from the comfort of your home. Reviews and investigations into the services offered however have noted a number of shortcomings of most service offering.
3 issues with robo-advice
1. Bias towards the providers own product suite
This has been raised with a number of the bank providers of the service where the robo advice selects only from the banks own product offering.
Like many software products, the robo-adviser is programmed to a limited offering and can only work as well as the algorithm that it follows. As such, there lack of outcomes from robo-advice, you are categorised and given advice based on your category (similar to your daily horoscope). Further, if you make mistakes when entering information, the advice will be inadvertently inappropriate. This follows the old-computer adage ‘garbage-in equals garbage-out’. There is no human filtering of entered information to ensure its consistency.
2. Lack of ability to deal with complex scenarios
Quite simply, the robo advice will seek to invest spare cashflow or lump sum amounts, paying scant attention to debts outstanding or the potential of the need to cater to changing circumstances. The failure of robo-advice in a similar scenario was recently reported in an investigative financial planning article.
This is a difficult issue for robo-advice programmers to overcome. Just like the flashback scene in the movie iRobot that shows the robot rescuing Will Smith’s character but leaving the child to drown based on survival probability, programs can’t always make choices that we consider to be ‘right’. Whether it is any number of ethical considerations that need to be addressed, or simply the dynamics of a situation that need to be considered, computers and robots can’t replicate what some would call our humanity.
3. Responses and advice provided is completely user driven
In essence, the robo adviser responds to the information provided and provides an answer based only on this.
Why is that an issue? Well in the case above, if you’re not aware of the available options you are limiting the potential benefit of the advice and may miss out on a much better potential outcome.
Imagine going to your doctors only to tell him that you have a cold because you have a cough and that you need some prescription cold medicine. I don’t know about you but I would expect my doctor to ask questions and explore whether my diagnosis of the symptoms was correct before sending me out. Otherwise I may never realise that the cough was actually from some other issue.
Similarly, I see much of value of advice as being able to work with clients and exploring other options that they hadn’t considered.
An interesting review
Robo-advice has up until recently been touted as the ‘future of advice’ and that advisers like us would all be out of a job in the next 5 years. However, it’s significant to note what Betterment, a major robo-advice platform in the US has recently done: started offering human financial advice, at a higher price point than if you sought your own adviser. Betterment originally set out to disrupt financial advisors and Financial Institutions with low-cost robo advice, and now finds itself offering those same financial advisors itself, while charging almost double the advisory fees!
Is robo-advice the answer?
At the end of the day whilst investment is an important part of any advice, it certainly is only a part of the advice picture. Robo-advice focuses in on investments and can miss the main financial advice story. A robot is unlikely to understand who you are and why you feel certain ways about your finances. The potential result of this is advice is that it will make you feel uncomfortable and will not relate to your longer term goals.
In terms of investment success, the robo-advice industry is very young and it is difficult to make a judgement call on how successful the advice outcomes have been. When it comes to designing a portfolio based on your predisposition to risk, there are a number of fund managers with a successful history of running portfolios on the same basis. As such, I don’t agree that you need another level of investment fees to provide an algorithm driven portfolio, which in most cases is predominantly holding one provider’s funds.
This will be an interesting industry to follow and I think the future benefits will be greater when it is complementing human advice rather than trying to replace it. I’d suggest waiting to see what comes from the industry in a number of years, when the concept is tried and tested, rather than risk your savings with the untried robo-advice version 1.0 that is operating today!