An Oxford study titled ‘The Future of Employment’ which predicted the probability of computerization of 702 types of occupations found that recreational therapists, supervisors of mechanics and repairers, mental health and substance abuse social workers had the least probability of their jobs getting computerized.
The less fortunate - data entry keyers, credit analysts, accounting clerks, umpires, referees, and other sports officials had the highest probability of their jobs taken over by computers. Interestingly, telemarketers had 99% probability of losing their jobs to automation.
Nevertheless, the reality is that an increasing number of jobs are being taken over by technology. In fact, ever since robo advisers have made entry in India, we are all wondering whether our neighborhood adviser will be replaced by robo. In the Oxford study, financial advisers had 58% probability of their jobs getting computerized. This implies that human element would still be critical in financial advisory.
Anthony Serhan, Managing Director, Research Strategy, Asia-Pacific at Morningstar delved deep into this topic at the Morningstar Investment Conference 2017 held in Mumbai on October 10-11.
What is robo ‘advice’?
Artificial intelligence, fintech, robo, block chain – these terms can be scary. But Anthony says that advisers need not fear them. Instead, they can learn more about these technologies and see how best they can adopt them.
What is robo advice? Anthony says that putting a few questions/risk tolerance questions on a website so somebody can invest is not digital advice. Answering risk tolerance questions don’t do a good job of picking an investment for a client. So it is not really ‘advice.’ These portals are essentially making it easier for clients to transact which, is an operational ease. Rather, ‘Advice’ is about finding out client goals, helping them estimate retirement cash flows, tax analysis, asset allocation and succession.
Global landscape
Australia
In Australia, there are a mix of B2BC (business to business to consumer) and B2C (business to consumer) robo advisers including banks. Some firms are using their own brand to reach out to investors while others are offering a white label service to their clients which have started in 2004. Few recent entrants in this space are Stockspot and InvestSMART which started in 2013 and 2014 respectively.
United States
In United States, the robo advisory market is crowded. The players include B2B2C, omni channel (firms which engage clients through all channels like mobile, telephone, desktop and physical store) and B2C. In the B2C space, Vanguard and Schwab (which are well established brands) have entered the robo advice space.
An interesting point to note is that established players like Vanguard ($70 billion AUM) and Betterment ($ 10 billion AUM) which have entered the market recently are capturing assets quicker.
Morningstar’s equity analyst Michael Wong who tracks this space reckons that it if you are a robo adviser, you need over $15 billion in assets just to start breaking even. Why? Because it's probably going to cost you about $80 million to acquire clients. Michael says that trust and brand are incredibly important to succeed as robo advisers. Fortunately, if you've already got clients, you are in a really good spot to move forward.
Another trend is that a lot of players are being acquired. BlackRock bought FutureAdvisor. Invesco acquired Jemstep. The list is long. This is how tech startups are making money by selling their businesses.
Will Silicon Valley tear down Wall Street?
Will Silicon Valley tear down Wall Street? Anthony doesn’t think so. Vanguard, yes, certainly might. He observes that Vanguard is well placed and if you look at their assets, it's a bit like online banking. Did online banking destroy retail banks? It didn't. It was really good for the banks, not very good for tellers admittedly, so albeit.
How we get disrupted
He drew his point across of how we are being disrupted by citing the analogy of Uber. “All the taxi companies could have got together and put together an app that looked like Uber years ago, but they didn't. They sat on their hands and were happy just to leave the world as it was and created the opportunity for Uber. And that's the thing about FinTech. When you look at it, you do need to seize those opportunities. If as an industry we do nothing, then you are leaving the door open. So, it's about making that progress,” said Anthony.
Types of robo advisers
There are different types of players in this space - pure-play asset management companies, advisory firms like Merrill, Ameriprise and vertically integrated asset managers like Charles Schwab, Fidelity and Wells Fargo. Charles Schwab has developed its own in house robo platform while asset management firms like Vanguard has in-house robo adviser. “And what's even more interesting, in this world of digital advice is that advisers are the ones who are doing just about nothing. Why? Because advisers are very used to sitting back and having technology put on the plate for them,” observes Anthony.
Asset managers globally are either buying robo advisers or developing their own platform to offer it to their distributors. The trade-off is that advisers are using somebody's else's technology to help take care of their clients. In doing so, they are accepting a closed architecture of investment options. Asset managers offer robo services to clients to attract assets – that’s the trade-off.
Besides, asset management firms and advisers, there are pure technology companies who build such platforms for advisers and in turn charge a fee for using their services. It would be interesting watching how these companies actually play out on FinTech.
Building a robo advisory platform
Setting up a robo advisory platform is not just about building a good-looking website. There is backend, modelling, budgeting, risk assessment, education, portfolio analysis, back office/education, client communication rebalancing, and custodial system. But can one platform offer all these services? “The reality is there are very few platforms who are going to be able to do all of that. What most people are doing is picking one, two, maybe three of them. Let's get started there. That's my adoption of digital advice; that's my next dawn or revolution and that's fine. Because to do all of that is going to be complicated. But the other thing is, when you are doing it, you need all of that stuff. You are still going to need this really good front end,” observes Anthony.
The front end should be such that it maximizes the probability that somebody is going to keep going with the journey. “You need to reduce the friction points when you are doing it. Yes, it needs to look good. Yes, it needs to engage. But that's the most important point, you want to make sure they don't drop out. And that takes testing, knowledge and something you've got to up for. But the good news is, there's plenty of people doing it and you can do it and you can find the people who know how to do it. And the great thing about the internet is, you can go to the websites who have done all this work and see how they have done it and do something similar. So, that's the way you see the rate of improvement is going through the roof because it is a very open system, quite a sharing system,” explains Anthony.
Who owns the data?
According to Anthony, we are not in a world where you need an envelope or a box full of receipts anymore, or this world where you are going to get clients to fill out a questionnaire and you will type it all in. Data and digital advice will take off when the data flows automatically. Some of the big firms are the ones who have a lot of data. The question is who owns the data? Anthony said that we own our data. “If the data is sitting with my bank, if I want my financial adviser to have that and he sits over there, I should be able to tell the bank to send it over there. I don't want to have to print out all my statements and tell the other guy to type it up again. This is going to be a really interesting development as all the systems come through,” said Anthony.
If we use a service for free, we are the product. We get lots of great apps. If we are using them they are collecting data on us. This is the trade-off which we are aware of. This is where we are going to create some great opportunities.
Going ahead, Anthony believes that there will be market for all kinds of players. “There will be cyborgs, full service brokers, plain robo-advisers as well as discount brokerage websites. So, please don't take anything as an absolute. RIAs versus distributors is not an absolute question. Both can co-exist,” believes Anthony.
The greatest advantage of fintech is that it will help advisers eliminate human errors.
Big Data
Anthony said that data is going to make a huge difference. Advisers already have their client data which they need to use effectively. He shared example of how Morningstar is using data. When we analyzed data of 6,000 advisers and 2 million accounts from a single platform, we looked at the actual client portfolio versus what the model portfolio should be for each client. We found that some advisers are doing a great job. This tells us that we should rope in these advisers to train their peers. Some of the portfolios were a bit off. This told us that this is where risk is. How is this going to be used? It can be a sales tool as well. Such data helps Morningstar identify training opportunities for advisers. That's the way Morningstar is using data and working with a number of large advice firms in the U.S.
Artificial Intelligence
According to Anthony, artificial intelligence (AI) will not be used for doing 101 basics which we already do in your jobs. Rather, it will be useful in analyzing unstructured information. That is where the opportunity is going to be.
Augmented reality is another form of artificial intelligence. Companies like Amazon and Apple are using a form of AI which is called speak technology. For instance, on Apple, they have Siri which uses your voice as input to perform certain tasks like playing songs. Imagine you're sitting there and instead of saying can you play my favorite song, the question is, how did my portfolio go today? That is where the opportunities for financial services could be.
