Written by Scott Machin on 25 February 2015.
Do your members have the tools and advice they need to make the right decisions to optimise their retirement income?
The Australian super system makes the individual responsible for their own retirement success. But the average person doesn’t know what are the right decisions or which actions they should take – they need financial advice.
Most funds don’t have the advice solutions to adequately support members, because traditional advice channels don’t suit everyone. Advice delivered face-to-face or over the phone is expensive and old school financial planning is still viewed as a service for the wealthy. But technology now enables the delivery of ‘robo-advice’ on mass and at a lower cost than traditional advice. Meaning that funds can deliver multi-channel advice that will greatly improve their members’ access to advice.
What is robo-advice?
The term robo-advice is being used to describe automated online advice. We believe that it is now possible to provide quality advice entirely online. Quality advice that is:
- based on current financial circumstances, past behaviours, attitudes and objectives
- to provide the customer with the information and support they need
- to make decisions and take the actions necessary to achieve their goals.
It’s worth getting advice
Research shows that people who get financial advice and put it into action will be better off in retirement. This is because people under advice are more likely to add to their super, invest appropriately and stay the course rather than react to negative market conditions.
How much better off depends on the individual’s circumstances, but research by the Financial Services Council1 has shown that after costs a person under advice could save around $1500 more super a year than a person going it alone. If under advice from age 30, the estimated boost to super is over $90,000 – take a look at the report for the details and assumptions. Financial Engines in the US has also conducted research which shows that with the right product choice and online advice (robo-advice) retirement savings can be up to be 3% better off each year.2
Yet ASIC found that only 1 in 5 Australians get financial advice.
People know they need help
As we’ve discussed in our blog Financial literacy is key, there are low levels of financial literacy across broad groups of the Australian population. And it’s clear that most lack the expertise to manage and invest their super for the best outcome – they need help.
The good news is that more people are recognising that expert financial advice can help them to achieve their retirement goals. According to an Investment Trends3 report, the number of Australians seeking advice is on the rise. King Loong Choi, Investment Trends Analyst, has highlighted the retirement planning concerns driving the interest in advice, “In particular, Australians are more worried about the adequacy of their retirement savings, the impact of inflation, and managing their cash flow.”
For the minority of retirees who can live off the yield of their investments, without drawing on their capital, retirement planning can be pretty straight forward. But for the majority who need to draw-down their capital to meet living expenses, the solutions are more complex – and these people need advice.
But, as this demand continues to increase, traditional advice delivery is unlikely to keep up – currently there are 22,500 financial advisers on ASICs Financial Adviser Register and this number hasn’t changed markedly over the last decade.
Costs and a lack of trust are barriers to traditional advice
While the number of people seeking advice is increasing, barriers exist for the average Australian. Traditional advice (delivered face-to-face) is still seen as expensive. Those on average incomes would find it difficult to pay for a full financial plan which can cost several thousand dollars.
The Investor Trends report also identified cost as a barrier, with Mr Choi noting that “When cost is taken into account as a factor, only a small proportion of Australians would prefer to receive the traditional model of comprehensive advice delivered face-to-face.”
Another barrier to people seeking face-to-face advice is trust. SuperEd’s focus groups highlighted the need for people to be confident that the help and advice they receive is independent and in their best interest. But recent well publicised industry scandals have done little to improve the profile of financial planners in Australia.
Robo-advice can build on an existing positive, trusted relationship without third party interference. In this way robo-advice can add value for super funds where their members’ retirement outcomes are paramount.
Robo-advice is affordable, anywhere, anytime and fit for purpose
What’s great about robo-advice is that it caters to the advice needs of the majority as a scoped advice solution. It isn’t suitable for scenarios which require complex financial advice – for example estate planning or taxation strategies. As a complement to traditional advice, robo-advice is integral to a multi-channel advice solution designed to maximise coverage and provide choice.
Robo-advice can deliver limited advice or write and implement a simple financial plan including investment management. Review and adjustment can be automated depending on the needs and objectives of the individual.
Depending on a super funds current infrastructure, robo-advice can be delivered extremely cost effectively – in fact Schwab have recently introduced a fee free robo-advice option in the US.
Another driver of robo-advice is the convenience and accessibility. Anyone with an electronic device can access and implement robo-advice – wherever they are, whenever they want. The take-up of online banking and share trading solutions has shown that people are ready to deal with finances online and that they appreciate the convenience and cost savings.
Because of the online delivery, scale is not an issue. Advice delivery is not dependent on the availability of an individual – either in person or on the phone.For a super fund, robo-advice is an AND not an OR strategy – it doesn’t replace face-to-face advisers or call centre staff. It provides additional member choice. Research has consistently shown that members are likely to use more than one advice channel. Robo-advice compliments traditional advice models and can integrate with existing advice solutions to provide a multi-channel advice offering.
The technology now exists to recreate the advice model, putting the needs of the individual at the core of the experience. Robo-advice won’t replace face-to-face advisers but it will extend the reach of advice, making advice available to most Australians.
“You’re going to see a major push from a technology standpoint and a rethinking of the business model standpoint around advice. The firms that figure this out will be the most successful.” Bill McNabb, Vanguard
1 Value Proposition of Financial Advisory Networks – Update and Extension, 18 January 2011, KPMG and Econotech
2 Financial Engines, watch their video.
3 Investment Trends 2014 Advice & Limited Advice Report, 2014, Investment Trends.