How robo-advisory can be applied to the world of investment advice

22 August 2017 7 min. read

The market for investment advice is changing rapidly, with robo-advice touted as one of the most disruptive forces to impact the industry. Daniel Meere, managing director at Axis Corporate, a management consulting firm, reflects on how robo-advisory can be applied to the complex world of investment services. 

Digitised and automated advisory services leverage advanced and more precise processes, algorithms and methods to assess client needs, building a more accurate picture of investment characteristics, uses and habits. In their report entitled “The evolution of private banking and wealth management resulting from digitisation”, Comarch and EFMA concluded that the personalisation of advisory services was the most important factor in digital advice, and was viewed as more important than the quality of the product itself.

The importance of offering the right product to the right person at the right time and place has become even more critical. By analysing clients activities and habits together, banks can better understand the needs of the clients they serve and match these needs with relevant offers which can extend far beyond the limited scope of traditional investment management services,” write the authors. 

In the banking sector, this changing client profile is something that Vietnam International Bank (VIB) among others consider the key challenge to which they must quickly respond in order to continue to meet their clients´ needs. In a report published by EFMA entitled ‘Retail Banking in Asia Pacific’, Warren Cammack, Strategy and Innovation Executive at Vietnam International Bank (VIB) comments: “We are about to launch a new service which will offer analysis of financial services needs via digital channels, enabling clients to gain a far better understanding of their needs and how VIB can help them to achieve their financial goals. Innovation is a key factor in VIB´s growth, and we see it as an integral part of providing the products and services to our customers to meet their needs. This enables us to focus our efforts on where our clients need them most. Launching our mobile banking app in 2015 was a major milestone for VIB. As a result we have seen solid growth in new clients as well as un uptick in satisfaction levels in our existing client base”.

The market for investment advice is changing rapidly

The market for investment advice is changing rapidly. Customers, used to having instant access to information on purchase decisions in all other aspects of their lives, are demanding this from financial services providers. With unregulated markets such as retail, FMCG and travel making ´nudge´ suggestions to stimulate interest from customers as they browse, the choice and information available is substantial. 

The financial services industry is yet to catch up, with many still offering a face-to-face personal wealth advisory service, or limited choice from a retail product set. Couple this with an ageing population that lives longer, the squeeze on pensions from both a funding and an investment perspective – this could well tilt the balance toward more automation, which would be augmented at higher asset levels with a personal relationship. 

With many banks abandoning the provision of financial advice to the mass affluent it is also providing a significant opportunity for new technology enabled players to enter the market.

Technology and robo-advisory

How can technology, which has enabled these other industries to improve customer education and experience, be applied to the complex world of investment advice? Is Robo-advisory approaching a tipping point? 

The wave of innovation in the financial services sector is often overplayed. Much of the so-called innovation amounts to little more than a slicker front end, or digitising a poor process, resulting in a still poor – but digitised – process. A proven model for evaluating technology change, and its impact on customer behaviour is a simple three-stage test. This asks three simple questions, which if answered as ´yes´ should indicate that the innovation is both valid and worthwhile.

Can robo-advisory be applied to the complex world of investment advice?

The first question is whether the customer will notice the change brought about by the innovation. In the case of robo-advisory, given that this is a customer-facing change and fundamentally transforms the process and the experience from one where the customer interacts face-to-face with another person, to one where they interact remotely with a programme, this is an emphatic ´yes´. Added to this, the pioneering nature of shifting what has always been a highly personalised, private and people-based interaction to a ´virtual´ interaction with a robo-advisory service marks a significant change for the customer that they are sure to notice.

The second question builds on noticing the change and asks whether the customer will value the change brought about by the innovation. The best answer to this is to assess the issues and drawbacks with the current advice experience. People looking for advice are often times poor, have a fear of the unknown and prefer not to share personal details with someone that they scarcely know. Using a robo-advisor can be far quicker, both in the time taken to receive the advice but also in the lead time to access the service. Being able to quickly fire up the service on demand, from your location of choice, rather than wait for an appointment,  may be important factors for those seeking advice. The fear of the unknown and uneasiness with sharing personal details may -with careful consideration to the educational approach and assurance around data protection- also be seen as easier to deal with via a robo advisory platform. 

The third question assesses whether the customer will pay for the innovation. This is a more challenging assessment, as one of the key obstacles to providing advice is the cost. Regulation such as Retail Distribution Review (RDR) in the UK have made advice charging more transparent, and less tied to products, but still the cost of personalised advice is prohibitive for most. This is also the area in which robo-advice has potentially most to offer. Using advanced analytics, machine learning, big data mining and mass customisation can offer highly personalised services at commodity prices. 

For robo-advisory to truly take hold, it may be the pricing model that becomes critical. As is often the case with disruptive innovation in financial services, the first to market addresses the underserved. As the un-advised begin to assess their financial futures, and the limitations of a dated face-to-face advice model are exposed, the market will open up to an innovative model that passes the three fundamental tests to deliver a faster, cheaper and better model for financial advice.