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Robotic Advice versus Personal Financial Service

Technology has certainly levelled the playing fields as far as South Africa and the rest of the world is concerned.

Gone are the days when we simply piggy-backed on what happened elsewhere in the world. Financial products and advice are, in general, on a par, if not better, than what the rest of the world has to offer. South Africa is often lauded for world class innovation in product development.

We also saw in recent discussion documents on proposed legislative changes that local conditions are taken into account, rather than simply applying what happened elsewhere. A classic example is the banning of commission in the UK which had a catastrophic impact on advisors. This resulted in a far more circumspect approach locally.

An interesting article in the Australian ifa newsletter provided a perspective from an American financial planning expert, Bill Bachrach, who suggested that “… robo-advice tools will decimate Funds Under Management-focused advisers, while ‘values-based’ practitioners will survive the automation trend.”

An internet search provided the following description:

A robo-adviser is primarily a web-based wealth management provider, which offers automated investment services. Automation extends to every part of the investment process from the original transaction, to providing tax-efficient diversified portfolios, and ongoing customer communications in relation to improving their asset allocations.

“The robo-adviser doesn’t compete with a true values-based financial planner, it only poses a threat to someone that just gathers assets and places them in funds and collects a percentage without adding much value,” Bachrach said. “True advisers are paid for the value they add as a human being.”

“While automated tools are highly competitive on the investment management front, they cannot compete with the human element, meaning successful advisers in the future will need to ‘stick to things that only humans can do’, Bachrach said.

He was also of the opinion that a significant number of advisers in the USA fitted the description of what is sometimes termed ‘policy floggers’ in South Africa.

Bachrach drew a parallel between the rise of robo-advice and the rise of managed funds in the early 1990s.

At that time, financial advisers in the US thought they were not going to be able to compete against the Wall Street investment houses’ push into retail funds management.

However, Wall Street executives soon realised they needed advisers in order to stop people exiting the products prematurely. In other words, they needed the human element.

In the same way, Mr Bachrach suggested that robo-advice entrepreneurs will soon realise that they need advisers to keep people using their technology.

“Advisers are there to stop people from making poor decisions, and a robo-adviser doesn’t have the capacity to do that,” he said.

“But it can compete on the investment side – in fact, the machine is probably better at it.”

The consultant and former Merrill Lynch adviser said he foresees a future where a majority of advisers outsource the asset management to a robo-adviser and focus on the client goals and objectives.

The drive to professionalise South African financial advisers started with the FAIS Act in September 2004, and carries on unabated. While the current initiatives stem from what the Regulator sees as continued examples of “mis-selling” and unfair outcomes for consumers, there are industry and legal experts who are of the opinion that current legislation is more than sufficient to prevent this, if properly and consistently applied.

The preference of certain clients to follow the robo-adviser route is not limited to investment business only. Many consumers believe that buying short-term insurance from direct marketers makes good sense as they are able to “…cut out the middle man…” and save on commission. Direct marketing is just robo-advice in another electronic format, and can, and should, never replace the relationship between the professional adviser and client.

Sadly, some direct marketing companies actually rely on the early termination of their products. It simply means that they receive premiums for a time without having to fulfil their contractual obligations.

Fair outcomes for consumers happen largely as a result of the personal intervention of professional advisers. This, together with the TCF outcomes, should always be borne in mind when contemplating legislative changes.

Caring for your clients remains the single most important element in combatting the potential threat of technology.

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