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Roboadvice could divert clients: Naylor

Financial advisers risk losing out on the next generation of clients to roboadvice, a New Zealand academic says.

Monday, October 31st 2016, 6:00AM 2 Comments

by Susan Edmunds

Michael Naylor, a senior lecturer in Massey University’s school of finance, has released a new book on the future of the insurance industry.

In it, he tackles the question of roboadvice more generally. He said it was not a fad but the future of financial advice – and the rapid development of artificial intelligence would help it to become more sophisticated, down to “talking head” avatar software programmes dealing with customers face-to-face.

He said financial and wealth advisers are currently under-estimating the potential impact of artificial intelligence (AI) systems. “Very few comprehend he ability of future AI systems to offer competent generic advice to 90% of investors. This is because they are evaluating the current state of roboadvice software rather than the rapid exponential pace of future developments,” he said.

He said the combined AUM of US roboadvisers is currently less than US$20 billion and no roboadviser had individually hit the level required for sustainable profitability.

But there was no reason to expect that to remain the case.

“US fund managers which use roboadvisers are currently doubling their funds under management every few months. Even if this slowed to an annual doubling of demand this would see robo-funds-under-management exceed human-advised funds within a decade.”

He said most financial advisers were complacent because they saw roboadvice taking over the segment of the market that would not traditionally have sought advice anyway, those with straightforward needs and smaller sums to invest.

But he said roboadvice could take those clients away – and they might not return as affluent older clients.

“Banks and other large financial institutions may offer roboadvice to these clients as a loss-leader, to attract clients to take out mortgages or transfer investment funds,” he said.

“The structural issue is that financial advisers may retain a high share of baby-boomers who are used the personal touch, but, however, the market share of roboadvice fund managers is particularly strong amongst the under-30s and the Millennials. These younger, compute- savvy clients are currently unlikely to be wealthy enough to interest an adviser. The danger is that when they do acquire wealth in a decade or so, advances of roboadvice technology, combined with their decade of using roboadvisers, will mean that it will be difficult for human advisers to attract them.”

Advisers could also risk losing affluent individuals who did not feel comfortable talking about their finances with a person, he said, especially as roboadvice moved into offering behavioural coaching as well as basic information.

Big firms with the ability to analyse large sets of client data, and to come up with insights such as the behavioral characteristics that helped financial success, would do better, he said.

“It is going to be difficult for small advice firms to match the IT investment and data warehouses of large mutual fund or banks. The key to their survival will be the availability of high-quality software from third-party vendors.”


Tags: Michael Naylor roboadvice

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Comments from our readers

On 31 October 2016 at 7:24 am Pragmatic said:
I agree with the sentiment that technology (AKA Roboadvice) will 'test' those industry participants who currently provide a thin value proposition or have little to offer.

Where technology will find it difficult to compete will be in the provision of trust. Trust is not immediate, is the foundation of this industry, and requires an emotional connection between the client & the provider.

Whilst I suspect that some consumers will prefer to engage with the industry via technology, I also suspect that many will seek (at worst) a second opinion from a human, to ensure that they are on track. Either way, the acceleration in technology requires the industry to clearly define how they add value, and to charge the consumer appropriately for this.
On 4 November 2016 at 3:24 pm Selwyn said:
The biggest change in Fire Insurance history has just occurred in the USA, while it is presently confined to New York, it will spread rapidly. The service allows you to insure your apartment or its contents in 2 mins, and make a claim in 1.5mins and do it all on your smart phone. Its coming to the Life and Invest planning business near you real soon!

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