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What is roboadvice, anyway?

What exactly is roboadvice? Is it even legal?

Wednesday, June 17th 2015, 12:00PM 2 Comments

by Russell Hutchinson

Roboadvice is one of the new terms to be used a lot in our business. There is some difference of opinion about what it really means. Some are interpreting the term broadly, and for them there are two main uses.

The first includes any combinations of websites and systems that help customers do some self-assessment and create an inquiry for bespoke financial advice that you might give in your current, human-delivered, process. I like the idea of using technology in this way and we should do more of it.

All the research around how consumers are investigating purchases online, but many then complete them with an adviser, supports this kind of development.

The second is the use of technology to make the preparation of a statement of advice much faster for an adviser. Once again this makes a lot of sense. Quotemonster is an example on the risk side – so is X-Plan by IRESS, Practifi on Salesforce, and many more systems like them. Some seek to offer an end-to-end solution, whereas others try to be good at just a couple of parts of the process.

However, as good as all these systems are, I would not call them roboadvice. True roboadvice is the fully automated provision of personalised financial advice. In my book that means that the advice isn’t completed, modified, updated, or even reviewed by a human – it’s just done by the system – and through periodic review it is ensured that it complies. This is a much tougher definition of robo-advice and by this standard there is very little of it around. It is also effectively not legal in New Zealand.

Although class advice can be offered by a company, rather than a natural person, all forms of personalised financial advice cannot be done that way. An AFA or RFA would need to sign off any full personalised advice, based on our reading of the current law. That actually isn’t really restrictive right now because such full advice systems are in their infancy. They have usually been developed with off shore markets (bigger markets over which to spread the big fixed cost of building these systems) and with specific jobs – such as asset allocation – in mind.

But sooner or later someone is going to want to offer these systems here. Then you have clients, some of whom may use off-shore systems because they want advice in this way, and will step outside the protection of our legal structure in order to access them.

One of the things considered in the Ministry of Business Innovation and Enterprise review paper on financial advice law is providing for roboadvice in the future. If you have a view you should grab a copy of the paper and see how it fits in, download the response form, and make your views known.

It is a complicated area and it is far from obvious to me exactly what the right answer is – but it is worth spending some time to consider.

Tags: roboadvice

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Comments from our readers

On 19 June 2015 at 4:50 pm Michael Taylor said:
The first given for Robo Advice is that it is client facing and online. OMNIMax has been developing these tools over a number of years. Initial online client engagement can be initiated through a social network campaign, website link, invitation or a focused landing page. Many consumers want to explore their situation before a face to face commitment. From the advisors point of view advisor want to see where they can add value and qualify the prospect. It is a win / win. This also allows for the input of educational content in the pre advice process. Link this with the alignment of client Goals, an initial Risk Profile tool and you have a client who is both motivated and presenting with a data set. An advisors dream?. This is the front end to an automated pre advice for either personalised advice or a self directed Robo solution. The consumer will decide. Whilst I am committed to personalised advice the pre advice online process works for me. Some consumers will want the DIY version. Perhaps it is not either/or but both. We ignore the power of smart technology at our peril!
On 25 June 2015 at 12:18 pm impartial_observer said:
I agree with Russell, the first 2 examples are NOT Roboadvice.

Providing engaging tools on your company website (eg. Insurance Needs and quoting, Retirement planning or Investment calculators and Risk Profiling tools) to educate/inform people with a view to them engaging with an adviser before execution is not roboadvice.

Neither is the streamlining of the advice process for advisers using technology. Roboadvice is a fully automated end to end advice and execution process without human involvement.

In terms of its legality in NZ, most early incarnations will target class advice so there's no issue, but full advice would still be achievable, it just requires more complex rules and algos and would require an authorised adviser to digitally "sign off" on the process and the advice that is being delivered programmatically.

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