The rise of the robo adviser

The whole basis of the Terminator movie franchise is that the world is heading towards a future which is being taken over by technology, and that the world is wholly unprepared for this reality.

While this was a novel concept in 1984 and 1991, by the time the third instalment of the franchise was released in 2003, we had become used to the idea that technology will be playing a significant role in society. But one wonders whether the financial services industry is prepared for this?

The evolving landscape

FAnews recently attended the Financial Intermediaries Association of Southern Africa (FIA) Johannesburg roadshow where the issue of technology was a hot topic.

Five years ago issues such as telematics and the geo-mapping of risk were unheard of. We merely trusted our clients that their driving behaviour was within normal paradigms and we calculated their risk based on their claims history. Now we have a computer telling us how our clients accelerate, brake and take corners. We are also told where the risks are concentrated and the likelihood of weather events occurring in those areas.

While technology has been an enabler over the past two years and has generally benefited the industry, we are now entering into the world of disruptive technologies which creates a whole new landscape that we are operating in.

The new age client

Before we delve into the world of disruptive technologies and the effects they may have on the industry, we need to know what the client of the future may look like. Jacques Rossouw, MD of Astute, pointed out that the rise of the robo adviser is being driven by the personality traits of the new age client.

Millenials are now making their way into the working world and are the clients of the future. These clients are characterised by the fact that they are used to feedback on a real time basis, they want focused human interaction, and they do not want to pay fees for advice they can get freely on the internet.

The world of the robo adviser

We have all heard of Uber and Airbnb and the effects that these companies will have on the insurance industry, but are we ready for the world of the robo adviser?

While advisers try to target the highest portion of the population possible, the economic reality is that only five percent of the population can afford the services of an adviser who can engage with them on effective retirement savings and a whole lot more.

Rossouw showed how this could open the door for robo advisers to service the remaining 95% of the population. “Does this mean that we are seeing a boom in robo advisers? Possibly. Statistics show that by 2020, assets under management by robo advisers will be in excess of R5.6 trillion. The reality is that millenials are just too busy to sit in front of a screen and track the performance of their investments. Robo advisers are perfectly suited to this as they are working off information supplied to them by the user,” said Rossouw.

Other mitigating factors

In addition to this, there are other factors which may be pushing people into a specific area when it comes to investing.

People do not like rules. It is human nature. They want to avoid rules as much as possible and they want to interact in a world where there is as little regulation as possible. This is completely the opposite of what we are seeing in the financial services sector which is currently going through a significant wave of regulatory reform.

This was experienced in the UK when the Financial Sector Authority implemented its Retail Distribution Programme. This saw the exiting of a number of advisers in the industry who could not fit in with the regulation. Because of this, members of the public in the UK were left without financial advice. They turned to the next best thing, online advice. And while we are seeing a number of advisers in the UK returning to the industry, statistics still show that 15% of UK clients are more likely to use robo advisers than humans.

There is also the massive lower income market in South Africa that need to be catered for. This population is becoming digital natives and will turn to robo advisers in order to facilitate their savings.

Editor’s Thoughts:
Will robo advisers take over the industry completely? No. It’s like the fact that you can’t watch a video on YouTube about how to perform open heart surgery if you don’t have the skills or knowledge of a surgeon. People will be advised by direct channels in the future, but these channels simply cannot advise the public on the whole of the market. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.

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