“Do you think that, to return to something we’ve touched on a number of times, that high quality financial advice is ever going to be something that is affordable for ordinary Australians?
I think, potentially, if it’s done through technology.”
— B C Hartzer, Royal Commission 22.11.2018, p6865
The future of advice?
When he resumed his appearance before the Royal Commission on 22 November 2018, Westpac CEO, Brian Charles Hartzer, addressed “some of the challenges in relation to delivering ongoing advice services … [and] high-quality services”. After accepting evidence that “there was a lack of [consequence management] policy application by the business” and gymnastically navigating the conflicts caused by vertical integration, profit-making and Westpac’s approach to Fee Disclosure Statements and ‘Opt In’, Mr Hartzer addressed digital advice directly.
Acknowledging that traditional advice was neither scalable nor affordable, Mr Hartzer introduced ‘robo-advice’ as, perhaps, the more viable option for ‘ordinary Australians’. Mr Hartzer explained:
.. there are a number of developments around the world in what’s sometimes colloquially referred to as robo advice which is where a customer essentially self-serves by putting in their information, taking tests around their risk appetite, their understanding of finance, and then the system, based on what they’ve put in, says, “Well, given what you’ve told us, here’s what the system would suggest.” And then it’s up to the customer to decide whether they want to go ahead with that. I think developments in that regard are going to become more available and – and be more scalable for ordinary people.
Some commentators have interpreted this this digression as Westpac’s admission that providing personal advice to the mass affluent market is unsustainable. Mr Hartzer certainly acknowledged the institutional tension between profit-making and the cost of compliance, and the challenge managing irreconcilable conflicts, but his position may be more pragmatic and far more ambitious. Perhaps Mr Hartzer’s focus on digital-advice is simply a recognition that the convergence of costs, coding and convenience provides Licensees with more effective mechanisms for profiting from advice.
It’s an effective and inspired strategy. By reframing ‘financial advice’ and offering technology as the replacement for financial advisers, he’s presenting a viable strategy for servicing the mass affluent market and one devoid of the risks of misconduct and the costs of supervision. In this future, financial advisers don’t compete with “computers and algorithms”, they are replaced by them.
Replacing conduct risk with systemic misconduct
“There’s so much promise on the one hand, but on the other, there’s a lack of maturity; in the technology, in business culture, in deployment strategy.”
— AI Business, Interview with Thierry Derungs, Chief Digital Officer for BNP Paribas Wealth Management
Currently, and despite the hype around Artificial Intelligence, digital advice is sorely limited; it provides automation, consistent application and standardised processes and embedded controls but complements, rather than supplants, traditional advice models.
Despite the ‘obvious’ benefits “computers and algorithms” offer over human advisers, they can be as flawed and biased as the organic systems they seek to replace.
In a recent investigation into the use of AI and algorithms in the US Criminal Justice system, Derek Thomson found that the Courts’ had embraced “algorithms that may be nothing more than mathematical expressions of underlying bias.” Worse still, with specific reference to the COMPAS risk assessment algorithm, the Atlantic noted that:
There’s another concern about algorithms such as COMPAS. It’s not just that they’re biased; it’s also that they’re opaque.
It’s a view echoed by the CSIRO in their Proposed AI Ethics Framework. They note:
ASIC and robo-advice
“Digital advice providers (also known as ‘robo-advice’ or ‘automated advice’ providers) provide ‘automated financial product advice using algorithms and technology and without the direct involvement of a human adviser”
— ASIC RG255: Providing Digital Financial Product Advice to Retail Clients
Robo-advice may be growing in Australia but not at the rate expected by some participants. While some applications of technology may be transformative, some will be complementary and some be irrelevant.
In their Background Paper 6, the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry repeated ASIC’s view that
“the provision of digital advice has grown rapidly in Australia since 2014, with a number of existing and new AFS licensees developing digital advice models.”
— ASIC Regulatory Guide 255: Providing Digital Financial Product Advice to retail clients
Robo-advice may provide cost and convenience but at the risk of less transparency and more systemic failures. To their credit, ASIC have anticipated these issues and published a Regulatory Guide outlining their approach to digital advice.
read asic’s digital advice policy
There is little doubt that technology – and its promise of increased convenience and decreased costs – will change the financial advice industry. In fact, it has already as Westpac’s withdrawal from traditional distribution models shows. The opportunity for consumers and advisers is to recognise the limitations and biases of both models and develop a hybrid model that delivers on the promises technology offers.
The exciting part of this opportunity is that the democratisation of talent and technology means that smaller, better motivated parties can succeed where larger parties flounder.
Good luck (and let us know if we can help).