In recent years the terms robo advice, hybrid advice and digital advice have been bandied about, pretty much interchangeably. But, asks Paul Hogg, are they really all the same?
Before unpacking what the terms mean, it is helpful to understand what outcome is being sought from bringing technology into advice in this way. Importantly, we are talking specifically about regulated advice here, by which I mean a personal recommendation made to the customer, rather than guidance, or helping people choose between different investment solutions.
I see two main objectives. The primary goal is to find more cost-effective ways of supporting advisers in delivering advice to customers. Achieving this leaves advisers with more time to focus on activities that add real value, like building relationships and delivering the financial plan, rather than carrying out routine tasks.
A secondary objective is to explore whether some types of advice can be successfully delivered without the intervention of an adviser at all - without, of course, the advice being so inferior as to not be of value to the customer.
It's important to recognise that exploring new ways of delivering advice is not a threat to the existence of financial advisers. According to OpenMoney's 2021 advice gap research, six million people would take regulated advice if it were more affordable. I think we'd all agree that finding ways to help many more people benefit from advice and close the advice gap has got to be a good thing.
Having set the scene, it is helpful to have some clarity around the opportunities these forms of advice present to firms. Firstly, the term "robo" appears to be largely meaningless. And because of this, it seems to create confusion and be of little value other than as a headline to try to attract readers - as I've shamelessly done here.
Hybrid advice and digital advice, however, are useful terms and, I believe, cover distinct propositions, although they are often lumped together as the same thing.
Hybrid advice is where the customer undertakes some of the work associated with delivering advice, alongside a human adviser. It provides firms with two main benefits. First, it saves the adviser time as the client undertakes some more routine work themselves.
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Your client can do important administration tasks like entering data and answering risk profiling questions, often via a customer portal, allowing you to concentrate on the real value-adding elements of advice. This improves the efficiency of the delivery of advice and offers the potential for lower advice fees, higher profitability and scalability, benefiting both your client and your firm.
A second advantage is that the client feels a greater ownership of the advice process, which in turn helps improve their commitment to the financial plan and loyalty to you and your firm.
Hybrid advice can be used for all types of advice - from the very straightforward to the highly complex. As the client interacts directly with the proposition, to be successful, you do have to make sure that your systems are easy, and secure, for clients to access and use.
Digital advice, on the other hand, is where algorithms are used to deliver advice and recommendations directly to the customer. This is more suited to clients with simple needs as it struggles progressively as the complexity of advice increases.
For the foreseeable future, advice algorithms will not be anywhere near as smart as a good financial adviser. For this reason, when used as a stand-alone proposition, digital advice is normally focused on a single goal, such as providing an income in retirement. And it is normally restricted advice (possibly covering several products from the same provider), rather than being whole of the market.
Is digital advice inferior to advice from a good financial adviser? Without a doubt, it is not the same as the truly holistic, personalised advice a human adviser can deliver. But for more mass-market customers with simple needs and limited wealth, where traditionally delivered advice is often too expensive, it is an extremely important means of delivering much needed financial support. It will invariably deliver a better outcome for such customers than no advice at all.
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Although distinct propositions with their own benefits and limitations, when put together, hybrid and digital advice can be powerful tools to drive growth and efficiency within traditional advice firms.
Digital advice can provide an entry point for clients with low investible assets and is a useful stepping-stone to ‘full-fat' advice as assets grow and circumstances change. Hybrid advice helps streamline your processes, saving time on administration and reducing rekeying of data, leaving you to focus on adding value to the client relationship and delivering the financial plan.
By using technology in this way, advisory businesses can slash the cost of advice and achieve the scale required to address the needs of more mass-market customers. Of course, you need to ensure that customers are engaged with the process and make certain that compliant advice is delivered.
However, the prize for getting the key elements right for advisory businesses is immense - scale, improved profitability and new ongoing customer relationships, which may grow to become customers who are serviced traditionally.
Hybrid and digital advice are more than just buzzwords. Combining the two within an advisory business has the potential to be transformational.
Paul Hogg is a senior business development Manager at EV
