The provision of financial advice is a well-established part of the service sector landscape. How might technology and regulation shape its future?
This article was first published in the May 2020 China edition of Accounting and Business magazine.
Powerful forces are influencing the future of advice. Not only are populations in many economies ageing and becoming wealthier on average, but Covid-19 has also raised awareness of the precariousness of our work and therefore our pensions and savings. Good financial advice is therefore increasingly important as more people rely on investment income to support them in retirement.
The market for financial advice is evolving in other ways too. Women are now significant consumers of financial advice, having become more involved in household financial decisions, increasingly managing their own incomes and typically living longer than men.
Changing consumer tastes and preferences also have an impact. Concern about climate change, human rights and other sustainability issues creates demand for socially and environmentally-conscious investment options. Meanwhile, the increasing range of complexity of products makes choosing the right ones challenging.
These are some of the factors highlighted in The Future of Advice: Overcoming challenges to deliver great consumer outcomes, a new report published by Chartered Accountants Australia and New Zealand (CA ANZ). Though focused on Australia and New Zealand and based on surveys of individuals in those countries as well as CA ANZ members, the findings provide insights for advisers and regulators around the world. They create a picture of consumer preferences and the part that technology could play in the provision of cost-effective financial advice, as well as some regulatory challenges.
Consumer demand and preferences
As the report shows, individuals with higher incomes are more likely to use financial advice. They do so for various reasons, but particularly to get help navigating the administrative and tax requirements of investments and to gain tailored advice to ensure their finances are safe.
When asked about the future of advice and how it might change, the top request is for advice to be less expensive. Cost is seen as the main barrier to using financial advice. Consumers also want advice to be more personalised to individual needs and more transparent. Such advice is more likely to increase trust in the adviser, as well as leading to good consumer outcomes.
One potential way to achieve such goals is through the use of more technology. For example, mechanising repetitive tasks could enable advisers to reduce the cost of their services. Increased efficiency and reduced costs could also be achieved by the introduction of ‘robo-advice’, which uses programs and algorithms to create customised financial advice based on information about an individual’s financial situation. Users enter personal details, such as age, gender, income, assets, financial goals and risk tolerance. However, as The Future of Advice indicates, many individuals are wary of robo-advice. Only 24% of survey respondents said they would use it, while 29% said they preferred to talk to a person and would never use robo-advice
Asked about their preferred format for receiving advice in future, 64% of respondents want to receive advice from a person, in real life. Consumers are far less willing to receive advice by phone or internet – even if delivered by a real person (16%). They are even less willing to receive advice from a robo-adviser, whether in combination with human advice (14%) or in isolation (6%).
Such strongly adverse feelings may change in time, as robo-advice is still relatively new technology. It could be a real help to financial advisers, who see its potential for making advice more affordable, transparent and personalised.
A blended model that combines robo-advice with human expertise could provide the ultimate solution in terms of high quality advice. For example, human advisers could help individuals to set their financial goals, overcome gaps in their financial literacy and address behavioural biases. Robo-advisers could then help consumers to manage their portfolios, acting on decisions to buy and sell investments and providing information for inclusion in tax returns. The technology could handle repetitive tasks, while human advisers remain available for irregular or complex inquiries. Technology could also benefit consumers in other ways, by giving them more control. New apps can help individuals to manage their finances more efficiently and flexibly.
As tech-savvy younger generations become more significant consumers of financial advice, demand for such technology is likely to increase.
Apart from resistance to robo-advisers, regulatory factors could stand in the way of lower-cost financial advice.
A majority of advisers surveyed (76%) see increasing regulation as a key challenge to making advice affordable and personalised.
Strong regulation is valuable. In many jurisdictions, regulations requiring particular professional qualifications for specific activities seek to raise and sustain the quality of the advice customers receive. However, there is also a risk that such requirements increase the cost of advice, making it unaffordable for some members of society.
There are also some regulatory questions about the impact technology such as artificial intelligence (AI) could have on the quality of advice. For example, how can institutions ensure their systems will not evolve to discriminate against a particular group? Can AI deal with human notions of fairness? How can an AI system explain its decision process to humans and can an AI system truly understand the decision process of humans? Such issues are likely to become increasingly important over time as the future delivery of financial advice evolves.
The report therefore urges policymakers to work with financial advisers and technology providers to resolve any tensions, ensuring that regulations strike the right balance between protecting consumers and enabling advisers to operate effectively.
Sarah Perrin, journalist
"Consumers want advice to be more personalised to individual needs and more transparent. Such advice is more likely to increase trust in the adviser"