Just another fad?

The 62 year old client slammed his fist on the table and the iPad literally bounced. 'This is unbelievable. How on earth have you understood me so well?' he exclaimed. He had just had his portfolio analysed and the investment risk profile assessed as part of an annual review. 'I've been a client of your firm for more than 20 years and it's always been a fireside chat, this is a massive upgrade. I've been waiting for you guys to introduce some technology!'

The manager responsible for the implementation later told me of his relief. He was in the room with the client and their financial planner, watching the roll out of their new digital risk profiling and financial planning service. Robo-advice
it was not, but a qualified adviser with
an exoskeleton of technology and process, it certainly was.

More than three quarters of UK adults now have a smartphone and even more own a laptop. Two in five of these people routinely make banking transactions on them, while 11 million people check them within five minutes of waking up. According to the Deloitte Mobile Consumer Report, smartphones are checked on average 13 times a day (that could mean that 65 to 75 year olds check their device almost every waking hour). The far more active 18-24 year olds segment check their phones an average of 100 times a day.

Clients will use technology at work or in their businesses, they'll bank online, they check and manage their mortgages and credit scores online. Consumers compare and buy holidays, cars and meals out with online comparison services; they research and make purchases from books to insurance using apps, and they take advice on almost every aspect of their lives digitally, even their health.

On average, we are more likely to Google our symptoms if we feel unwell before consulting our partner, family or friends and only then might we consult a professional GP or pharmacist, according to the Digital Health Report. Is financial planning likely to be immune to this tsunami of digital change? Of course not.

This is a challenging time for companies of all sizes that deliver, or want to deliver, personal financial planning and regulated advice as part of their proposition. On the one hand, clients expect you and your firm to deliver high quality services which, for people who have money, increasingly focus on their more complex retirement planning needs. On the other hand, fee structures are much more transparent while the regulator's requirements to ensure investment suitability are only moving in one direction - upwards.

It requires a huge amount of effort and resource to deal with the day-to-day as many of the systems and processes in the financial advice world still hail from the last century.

The promise of digitally supported advice (our umbrella term for everything from planner-led digital solutions to customer self-service or automated robo-advice) is significant:

1. It massively boosts a firm's productivity while reducing the costs and increasing access advice and planning services;

2. It reduces compliance risk by building suitability into the firm's DNA; and

3. Delivers an ongoing service, so firms can retain and grow customers who will be delighted to pay ongoing fees.

Asset and risk modelling - enabling an accurate risk return trade off

At the heart of great financial planning is the ability to help customers trade off risk and return over the long term, in a consistent and accurate manner. Martin Wheatley, former CEO of the Financial Conduct Authority (FCA), put it well: 'The word we need in the back of our minds, at all times, is suitability. I want it pinned up on the walls of wealth management board rooms, meeting rooms and tea rooms. I want customer service to become institutionalised in this industry.'

Good financial planning is helping customers achieve their goals at a level
of risk they're able to take. Done well,
a business can harness a powerful engine that technology can utilise for growth.

Done badly, it is a recipe for disaster as so many mis-selling episodes and regulatory fines have shown. The more you use digital services, the more you will need to clarify and ensure the accuracy of your asset and risk model. This is the 'engine' and it will power the ship, helping firms capture the opportunities that flow from the digital wave.

Digital financial planning solutions can be categorised into a hierarchy, from those that can be more simply automated to those which are more complex. At the bottom of the hierarchy sits simple cashflow modelling and gap analysis. In the middle, investor risk assessment, asset allocation, goal based planning, portfolio construction and re-balancing. And at the top, product or tax wrapper strategies that dictate which solutions should be invested in or drawn down from and in which order.

Is it feasible for a client plan which gathers all the necessary data and constructs a flight path from start to finish to be built by a robo-adviser? Absolutely.

How likely would it be that the automated advice emanating from a machine would be acted up on by either planner or customer? Not a hope. Why?

• The amount of data that would have to be gathered from the client would be enormous. Not just hard facts about their current arrangements (financial and non-financial) but soft facts about how they feel, their goals, ambitions and aspirations for the future.

• Life happens. Clients lose their jobs, receive a promotion or their partner could become sick etc. The plan is then out of date and either irrelevant or requires a whole new calibration. Would we trust a machine or qualified pilot to steer us on the correct path?

• Mental accounting is the phenomenon first named by Richard Thaler, whereby people treat money differently and place it mentally in different 'pots', depending on factors such as the money's origin and intended use. Organisations across the world have run into issues when trying to replicate or codify this phenomenon - it increases complexity.

• Finally, automation is not always desirable. Financial planning requires customers to make conscious decisions and take actions, e.g. agree to drawdown a pension and take investment risk. These decisions are emotionally charged and risk based, where customers have to be active participants, not passive passengers.

The real opportunities for digital lie in:

• De-risking the investment process, ensuring suitability and improving customer outcomes. Planner-driven digital services can ensure that a customer receives exactly the same service and the same risk profile and investment strategy across the firm, regardless of who they see and where and when they see them. The result is happier clients, improved consistently and, better professional indemnity insurance premiums.

• Avoiding portfolio drift and ensuring ongoing suitability. If a client's investment drifts and begins to change its risk characteristics, they can be informed and advised accordingly. With a discretionary mandate, the planner can rebalance to reflect changes and bring the portfolio back into line with the agreed risk profile.

• Reducing cost to serve. The use of a digital service means seven times as many customers can be served. It can reduce the 6-8 hours of financial planner time for an investment review, to 47 minutes. A huge saving all round.

• Better interactions and improved 'share of wallet'. Digital financial planning makes financial services, a notoriously intangible product, more tangible through an interactive plan which puts the customer and not the product at the centre. Many planners have found their customers will entrust them with more of their wealth to plan as a result.

But what of pure robo? Without doubt, automated customer self-serve options offer an opportunity to engage with lower balance customers. Firms and institutions with existing customer bases have a competitive advantage because acquiring new customers and building a financial planning based relationship from scratch, particularly around investments, is hard and expensive as every pure robo proposition is finding.

Building on existing relationships where there is some level of trust will yield results faster. Properly targeted, well supported multi-channel initiatives work and can open up significant new client bases that would have been traditionally out of reach.

Ben Goss is CEO of Distribution Technology

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