The success of ‘robo-advice’ is easy to explain: online platforms that apply smart algorithms to give the customer personalised advice – scalable, affordable and always available. So is there still a place for the human advisor in the wake of this automation?
As with so many trends, robo-advice comes to us from the other side of the Atlantic Ocean. In the US they mainly use robo-advice for asset allocation; software calculates the ideal investment categories and even in some cases your entire portfolio on the basis of your investment profile and investment preferences. The robo-advisor looks through time, all the way through to your pension, for example, and helps you optimise your investments. From a cost perspective this is ideal of course, work that used to be done by a human advisor at a charge of around 2 to 4 per cent per year is now done by an online platform at a fraction of the cost. A charge of half a per cent or less is already fairly normal.
Robo-advice is for the masses
In terms of volume it is all still marginal, but a flight of capital into robo-advice is starting to develop. The technology can only get better and cheaper and the effect of this is to lower the threshold. Advice for financial insight used to be mainly for the rich, but robo-advice makes it available for the masses. The number of human advisors in the meantime is in decline, low margins, an excess of regulation and high training standards being the reasons for this. At the same time the products on which they advise are actually becoming simpler, but financial insight for the customer is still needed. It is logical that automation through robo-advice is filling the gap that has emerged.
Robo-advice automates financial planning advice, but also the monitoring of customer contacts for which parties often have an obligation. In the Netherlands, robo-advice will also bring about a change in the mortgage market. Uniquely for this country we have a genuine mortgage advice market here. In many countries things are different; in the US, for example, a mortgage is a commodity for which there is little advice. Now that the Netherlands has switched over to just two kinds of mortgage – annuities or linear – a situation is developing in which advice can be generated online. This will have a major impact on charges. Some advisors are still asking for 3,000 euros for advice, but with the advent of online platforms such as Hypotheek24, it is already possible for 650 euros. This amount will come down further in the future, by automating even more back-office processes.
Advice landscape is experiencing fundamental change
How should providers of mortgage products and advisors deal with the robo-advice trend? The advice landscape is experiencing fundamental change, but there is still a human factor. At the same time advisors will use automated platforms, especially where customers expect interaction and because they themselves cannot be available 24 hours a day. The youngest generation of customers, the millennials, in particular expect an online, mobile experience, but one in which they are able to compare themselves with peers and seek an experience in which they can learn from others. This generation is changing the game in many ways, but the key is that even they do not want to rely on ‘robots’ alone. Other people can actually give you a feeling of comfort.
The advent of robo-advice is a sign that financial service providers must keep up with the expectations of young people. Automating and aggregating customer data are becoming more important. Whoever does this well is the better advisor. Good service, attractive charges and reputation are key, however. The net promotor score – what other people say about you on the internet – will become more important. Everyone has to work on a good reputation because the advisor is assessed on the success of the customer. And this is precisely where we cannot leave everything to robots; you can put data such as age and income in an algorithm, but can it really know you and know what is important to you? You can always tell a robot that you can save money by buying product A instead of product B, but there comes a time when advice also becomes psychological and it is a matter of who you are as a person. In other words, what is your financial DNA? A human advisor will always be needed here.
By Jean-Francois Rodrigues, Senior Account Executive, Advicent.