The Fourth Industrial Revolution (4IR), described by Wikipedia as an age ‘characterised by the fusion of technologies and the blurring of lines between the physical, digital and biological spheres’, will drive global economic growth for the foreseeable future.
4IR will change how consumers interact with product and services providers as evidenced by recent developments in the fintech, insurtech and biotech industries, among others.
READ MORE: Fintech rising
Over the past decade banks, insurers and investment firms have leveraged improvements in digital technology and artificial intelligence (AI) to create cost-efficient, autonomous robo-advice platforms through which digital-savvy consumers can transact for a range of financial products.
The rapid growth in fintech and insurtech solutions has left many IFAs wondering about the impact of technology on their profession. Their principal concern is whether robo-advice platforms will contribute to disintermediation in the financial services sector – will robots replace human advisers?
What the regulators say
“There is evidence to support that AI-backed digital technologies will revolutionise how we give advice including risk profiles and the subsequent structuring and balancing of investment portfolios,” says Ewan Naude, head of intermediary partnerships at Investec Wealth & Investment.
“Over the next decade one of two scenarios will emerge: Either robots replace IFAs and traditional advice practices or the advice industry evolves to offer clients a combination of traditional- and technology-backed advice”.
In the latest draft of the FAIS Fit and Proper regulations, South Africa’s Financial Sector Conduct Authority (FSCA) defines robo-advice (or automated advice) as “the furnishing of advice through an electronic medium that uses algorithms and technology without the direct involvement of a natural person”.
More colloquially, a robo-advice platform applies technology to offer clients discretionary asset management services. But nothing prevents the robo-advice platform from handling the entire financial advice process from risk profiling, to choosing suitable risk-weighted investments, to adjusting the investment portfolio over time.
The regulator offers some assurances in that it requires each robo-advice platform to appoint at least one key individual who meets the regulatory competency requirements. This person would also have to understand the algorithms, assumptions and risks incorporated in the robo-advice platform. (The latter requirement presents new challenges because we are fast approaching a time when humans will be unable to unpack the solutions created by AI, but that is a topic for another debate).
Over the next decade one of two scenarios will emerge: Either robots replace IFAs and traditional advice practices or the advice industry evolves to offer clients a combination of traditional- and technology-backed advice.
Robo-advice entering the realm of investing
AI-backed robo-advice platforms have already made significant inroads in discretionary stock market investing, with smaller advances into asset management. Estimates out of the United States suggest that around $14 billion of the $5 trillion in assets under management with investment advisers are managed on robo-advice platforms. (Although a big number this is only a fraction of the total market).
These platforms typically determine optimal investment portfolios and assist with rebalancing these portfolios over time. Asset managers have used computer modelling for portfolio decisions going back decades, so it can be argued that this aspect of AI does not pose much of a threat to IFAs. Besides, IFAs still hold the upper hand in truly advice-dependent financial functions such as estate, retirement and tax planning.
“The challenge presented by robo-advice platforms is in their ability to attract younger, digital-savvy consumers as well as the perceived cost benefit of digital versus human advice,” says Investec’s Naude.
“We remain unconvinced that robo-advice platforms will outperform IFAs insofar information gathering, the necessary client disclosures and the subtle nuances of human communication”.
The risks of robo-advice
A real risk emerges from the robo-advice platform’s inability to gauge the client’s understanding of its advice processes and eventual investment recommendations.
IFAs enjoy real advantages over robo-advice platforms thanks to the human interaction between adviser and client. “Face-to-face interactions are critical to establish and develop a trust relationship between adviser and client,” says Naude.
“Fit and proper advice requires the IFA to have holistic knowledge of each client’s life circumstances and investment objectives – personal information that cannot be gathered reliably through digital channels”.
The ability to interact on a human level serves as a natural defence against robo-advice and IFAs are therefore encouraged to focus on this aspect rather than product selection.
IFAs can leverage AI-backed technology to enhance financial advice
There are dozens of ‘how to survive robo-advice’ articles on the internet. Common threads in these articles point to an acceptance of technology as a productivity enhancer, a panacea for aging and a way to introduce economies of scale in otherwise cumbersome investment processes.
IFA practices should embrace the positives that come with AI-backed technology and use these to enhance their service offering. “Your overarching role is to reach a deeper understanding of your client’s investment goals, investment timeline and risk appetite,” says Naude. “You can then feed this information into digital tools that assist in structuring an optimal investment solution and facilitate ongoing client servicing”.
The AI-backed technology revolution may seem daunting; but the changes it introduces do not require major shifts in thinking. An IFA’s ‘reason for being’ is to place his or her clients in an optimal portfolio of investments to achieve appropriate financial objectives over the client’s life. AI-backed technologies will prove invaluable in reaching these goals.
"Your overarching role is to reach a deeper understanding of your client’s investment goals, investment timeline and risk appetite."
“Robo-advice will never replace human interaction, so the IFAs core function is never under threat,” says Naude. “Successful IFAs will include digital innovation as part of their holistic advice process – in doing so they will improve their value proposition, strengthen existing client relationships and expand their potential client base”.
IFAs are among dozens of professions that will be tested by 4IR and its AI-backed technology advancements. The use of artificial intelligence is pervasive and is already being applied by short term insurers to model premiums, by international news networks to generate news articles and by legal firms to assess likely outcomes of their arguments, to name a few.
“IFAs must embed AI-backed and digital technologies within their traditional advice model to give their clients the best of both worlds,” concludes Naude. “The value created by client-centric advice, face-to-face communication and the trusted adviser-client relationships will ensure that IFAs prosper through 4IR”.
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