19 Oct 2015
Financial advice is changing: what technological advances could have in store for the industry
The future of financial advice looks uncertain, and has done for a while. Here and Financial Advice Network, we have examined how the Financial Advice Market Review (FAMR) will make a difference to the industry, the future of the Financial Services Compensation Scheme Levy (FSCS) and the coming of the secondary annuity market.
There is another creeping issue that is set to change the future of financial advice as we know it; the ever growing technology market. Investment giants BlackRock and Hargreaves Lansdown have already begun to invest in research for technological driven alternatives to financial advice for consumers caught in the RDR “advice gap”, and the idea of “robo-advice” has been called the “talking point of the moment” by industry experts.
Online advice and algorithms
The UK is evolving into a society that increasingly depends on the internet. In 2015, you would struggle to find a school, workplace or home without a computer or some form of internet access. Many children and young adults have grown up with an abundance of information at their fingertips, they book holidays, make banking transactions and even fall in love online. It would not be outlandish to expect them to expect financial advice online, in a quick and simple way.
We could be entering a new era for financial advice. Not only are young people going to be looking for financial advice online, but people caught in the “advice gap” caused by the Retail Distribution Review (RDR) will be looking for alternatives to the traditional advice route. Interactive media and 24/7 accessibility has become the norm, and financial advice needs to find a way to keep up with this.
The idea of quality online advice, or “robo advice”, is the use of algorithms to help people handle their money based on questions they answer online. This would mean companies would be able to offer advice to people quicker, and at a significantly lower cost.
How could this effect the industry?
If “robo advice” takes off, it could have massive reverberations across the whole financial advice industry. The worst case scenario sees the value of quality face to face advice fall, with smaller firms suffering massively due to the high cost of the technology needed. Also, software companies with no prior experience or investment in financial advice could dominate the financial advice market.
The more likely scenario is that robo- advice and face to face advice could work along side each other, as a two-tired system. This could work by initial meetings and advice being delivered face to face, and then transitioning to a more online based service. Also, more complex or high net worth clients may be offered financial advice in the traditional way, and clients will less complex issues or a smaller net worth would be able to access the robo-advice.
Is it a likely scenario?
There have been many issues highlighted when it comes to robo advice. Many financial advisers and software experts have both argued that technology is not yet good enough to cope with offering complex financial advice. Many advisers also believe advice that may be hard for someone not in the industry to understand should be offered face to face, as there would be no way for an algorithm to judge if a person understands the risks they are about to take.
The issue of accountability has also been raised. Consumers are currently able to speak to the Financial Ombudsman of the FCA if they have any issues about their adviser giving them inaccurate advice. If a person were to complain about an algorithms advice, it would be really tricky to work out who would be accountable. Would it be the software creator, the financial advice firm, or the consumers fault?
Until the technology catches up and the issues are ironed out with the regulators, we are only on the fringe of what robo-advice might accomplish.
The changes to the financial advice industry over the past two years have resulted in new client behaviours, increased compliance pressures and increased oversight from regulators. The financial advice industry faces some new challenges in the near future, and will need to adapt to stay relevant and profitable. Robo- advice will hopefully be something to embrace, which will improve the scope and access of financial advice, instead of something to be feared.
What do you think about this? If you would like to share your thought, opinions or let us know how you have seen financial advice change over the last two years (good or bad) please get in touch, or let us now via Twitter @FANUKltd or LinkedIn.