FECIF - The European Federation of Financial Advisers and Financial Intermediaries

Editorial - December 2016

Paul ResnikPaul Resnik
Cofounder & Director of Finametrica

Robo 3.0

Robo advisors are, beyond any doubt, hugely disruptive to the financial advice market. But not in the way that many people expect.

Many commentators and analysts are still focused on trying to pick the ‘Uber moment’, when robos wipe out the old world by creating a new market condition. But that simply isn’t going to happen. Robos are not disruptive in the Uber, Google or Apple manner – they are not a new paradigm.

Robos are disruptive because they change the speed, accuracy and supply of financial advice processes – just as the power loom changed the speed, accuracy and supply processes of woven cloth. Good cloth was no longer hard to find. The hard part became finding customers to buy it all. Make no mistake – the robo revolution is real and it is happening right now.

But, at the same time, the robo space is inherently confusing because it is evolving so rapidly, and dramatically. The robo species is becoming so diverse that we now need to name the many different breeds of robo adviser. A Chihuahua and a Great Dane are both dogs, yet there are distinct differences between them. In the robo advice world the differences between an enterprise robo and an entrepreneurial robo can be just as stark. The enterprise robo is a client retention tool, whereas an entrepreneurial robo must be a customer acquisition machine.

In our latest report, entitled “Robo 3.0”, we have delivered clarity and guidance to financial services enterprises who are grappling with how to integrate automated advice into their business.

In simple terms, humans are involved in robo advice in two ways:

  1. As the reviewers and ‘fixers’ of people off-ramped from robo advice platforms because they fall outside the algorithm’s capabilities to make a recommendation.

  2. In hybrid advice models, delivering consistency and productivity benefits of automation while retaining the discretion and expertise of a human advisor.

Over time, hybrid advice will become the dominant robo advice model. A powerful driver will be that the industrialisation of process significantly de-risks the giving of advice for the institution, as it limits an individual advisor’s capacities to act ‘off script’. But, surprisingly, the hybrid advice model is rarely discussed in the financial media. Research from My Private Banking sees assets under hybrid management growing to US$3.7 trillion over the next five years, reaching US$16.3 trillion by 2025. This will represent around 10% of the global investable assets, compared with an estimate of less than 2% of all assets for ‘pureplay’ robo advisors.

At the margins, some human jobs will inevitably be lost as robos replace humans at lower-level, process-oriented tasks. However, the overwhelming role for robos will be in ‘hybrid’ systems, where a human advisor continues to be involved – we usually refer to this as a ‘cyborg’ model. For almost two years the primary focus on robos was around the question “Will robos replace humans?” This question was always misguided and served as a distraction from the bigger issue of robo advice being integrated into the human advice processes.

Vanguard is the giant in the robo space with more than US$30 billion under management – more than 6 times the assets of Betterment. But Vanguard is not a ‘pure-play’ robo – it is a hybrid, or cyborg, model where humans are augmented by robo technologies. Fidelity is similar – the digital dashboard is robo-driven, but portfolio decisions are made by humans. While Financial Engines could be described as the grand-daddy of all hybrid systems, where humans are supported by technology.

Cyborg models address several of the key strategic issues that often lead to the delay, or halt, of implementation of a robo solution.

For more information please see our complimentary report which can be downloaded, free of charge, at: http://www.riskprofiling.com/robo3

The above was kindly provided by Paul Resnik and FinaMetrica and is a snapshot of some of the excellent content found in the company’s latest report, “Robo 3.0”. FinaMetrica specialises in risk assessment and suitability services for advisers and intermediaries.

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