Man vs Machine

We can dismiss robo advice as something that won’t take off but I think that would be foolish.

Is the trusty “old” financial planner soon to be consigned to the dusty books of history (or Wikipedia)?

It’s a challenging question; with so much innovation in a relatively small period of time how much of a battering can the industry take?

Rapid technological advancements make it very hard for industries like financial planning to keep pace. This is in part because so much of what is done is old fashioned face-to-face advice but the accessibility (via the web) of much of what an adviser does means that this is being challenged, and could perhaps change the face of financial advice for ever.

We have seen this with the growth of DIY investors. For years direct propositions sat in the background with financial advice in prominence, but technology created the behemoth company that is Hargreaves Lansdown (the reality is that there is very little that can destroy that business model (except themselves), and it will simply grow).

The latest challenge is the birth of robo advice. Some would have you believe that this technological development is the final nail in the coffin for financial advice, and I want to explore whether there is truth in this or to quote XFiles “it’s fear mongering claptrap isolationist techno paranoia”!

What is robo advice?

The origins come from the US, Canada and Australia with its popularity growing in Europe and India. The offering is somewhat different to that proposed in the UK. Within the US it is all about investments, and matching someone with the right options. It doesn’t cover more technical issues like estate and retirement planning which is a key element of the advice process.

Clearly others have seen technology develop in this way, and feel there are no barriers to what else it can do. The aim in the UK is to build on what is out there and go further to develop solutions which take on what an adviser does. This might seem far-fetched but there are people developing this technology.

Ultimately the aim is to develop a virtual adviser where there is no human interaction but where the same outcomes are achieved (if not better outcomes)!

Will it work?

We know the technology is being developed, and is being tested. This is the first step. The second step is how to do you get people to use it and who will promote it.

Hargreaves built their model over a 30 year plus period, others have tried to replicate this and failed. Engagement with the end consumer is very hard, and simply having the technology on its own doesn’t equate to success.

But the millennials (those born between the early eighties and 2000s) are the ones most likely to engage with this technology. These individuals are tech savvy, and happy to interact with a machine rather than a human. For them online banking, shopping and communication are all part of everyday life and in theory, these solutions would be perfect for them.

So who has the ability to make this work? It is unlikely to be an unknown brand without any financial resource.

The obvious answer is therefore Hargreaves; their average portfolio size is about £70,000 (latest Report and Accounts) but it is much harder to find the average age of their investors. This is important because we don’t know if their model appeals to the millennials. A recent report by Platforum indicated that the average age was 57 but this doesn’t give us any light to their engagement with young people.

If we exclude banks, less obvious options would be the likes of Amazon, Facebook and Google where technology developers license their products to them. This would be interesting as it would give instant engagement with the millennials.

This is a major challenge and one that will play out over the coming years, and likely there will only be a handful of winners.

Where now for face-to-face advice?

There are certain things that we naturally feel comfortable with by talking to someone. We can dismiss robo advice as something that won’t take off but I think that would be foolish.

Today the requirement for financial advice is felt more than ever. The options at retirement are complex, as are the options to plan and save. Perhaps robots can do this, but can they stop us from making irrational decisions? Ultimately we can override what the computer is saying. It is much harder to do that with an adviser and that is a good thing on occasion!

If we reverse this there is a greater challenge; fewer people are becoming financial advisers and more are retiring. The numbers are slowing and will decline, meaning the availability of advice will be restricted. At the same time, we are already seeing that there is a lower limit for when advice is being offered (circa £100,000) and this is leaving the average person without any access to advice.

In summary as we sit here today there remains a need for advice that robots cannot replace, however the millennials are more tech savvy and happier to communicate with machines. If this market is captured by an automated advice process, then this could be a challenge for advisers.

But on the flip side with a potentially declining adviser population, and the fact for higher value clients the need for face-to-face advice is unlikely to disappear, the two should be able to work alongside each other. However, to work advisers need to be able to articulate what they offer in a way that people see value. If they can’t do this, then perhaps machine will replace man.

Note: This is written in a personal capacity and reflects the view of the author. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. This is not a recommendation to buy any product or service including any share or fund mentioned. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.

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