Digital Advice – friend or foe?

Digital advice is the provision of automated financial product advice using algorithms and technology without the direct involvement of a human adviser.

The 2022 Quality of Financial Advice Review draft terms of reference mentioned it would pay particular attention to how technology and digital advice might enable mass market adoption of low-cost advice, particularly for young consumers and those with low asset values.

In a recent podcast of the ifa Show, Craig Keary, Asia-Pacific chief executive of digital advice provider Ignition, said the disruption happening in financial services and the advice sector has been accelerated by around five years due to the pandemic.  It is in this context that financial advisers should explore how they can best use data to their advantage and to make their businesses more efficient.

Rebecca Pope, head of intermediary for Vanguard Australia, said remote working during the pandemic had helped advisers understand the role and benefits of using technology in their business.

“We are still learning about technology and where it can take us, what is the role of artificial intelligence, how can we leverage data to the best of our ability? These are uncharted areas we are yet to explore and we need to think about how we can use them in the future.  It’s about having a good CRM [customer relationship management] system in place, as this enables advisers to look at clients’ engagement and behaviour and how they can be leveraged more effectively.”

Most in the financial advice industry agree that digital advice alone will not win the day – engagement and interaction with a human financial adviser will still be paramount for most clients.   For example, Ms. Pope explained, “(Vanguard) have got an advice business in the US which was positioned to be digital only and we learnt that people still wanted to speak to a human in person. Human interaction definitely plays a role so it is really important that companies have a hybrid model. Now [the service in the US] has evolved and it is supported by physical advisers as well.”

Craig Keary, chief executive APAC at Ignition, said: “We believe that digital advice is not a replacement for the great work that human advisers do, rather it leverages a human adviser and makes them more effective and more efficient.”

When it came to cost, Keary said digital advice technology could result in the cost of advice delivery falling by as much as two-thirds from its current cost of around $3,500 a year on average.

Some industry participants are still unsure if technology would allow them to correctly meet their regulatory obligations but Keary said the Australian Securities and Investments Commission (ASIC) had already provided guidance for fintech.

“Digital advice already swims between the flags, and meets all compliance requirements of traditional advice rules such as best interests duty, and appropriateness test.  Digital doesn’t dilute compliance standards; rather it lifts them. In particular, the automation of data gathering, checking, and algorithmic development of recommendations, results in consistent and quality outcomes for consumers.” says Keary.

There has been a significant uptake of fintech and robo-advice overseas which demonstrated a possible pathway for Australia in the future.

“There are tools which have struggled here but then found a niche overseas, the Australian market is more complex particularly with tax and superannuation.  It is already evident that digital advice is taking hold in the UK, with the use of technology to facilitate digital advice delivery no longer seen as radical. Our experience in the UK and Europe shows that hybrid digital advice models are currently the dominant institutional preference. We expect all UK financial firms will have digital advice incorporated into their strategy by the end of 2023.”

Can advice be single issue “scaled” personal advice and still be compliant?

The short answer is “yes”.

Since the introduction of the best interests duty and the challenges that industry have identified ASIC has released regulatory guidance on the issue of ‘scaled advice’ in RG244 Giving information, general advice and scaled advice.

Some points noted when giving scaled advice are:

• all advice is scaled to some extent, including advice about complex issues. Advice is either less or more comprehensive in scope along a continuous spectrum, and cannot be ‘categorised’ as ‘scaled’ or not;
• either the Adviser or client can suggest limiting the subject matter of the advice. However, the Adviser must scope of the advice in the best interests of the client;
• when the Adviser is deciding on the scope of advice to provide to their client they need to ensure that they do not reduce the scope of advice to exclude critical issues that are relevant to the subject matter of the advice;
• the rules that apply to ‘scaled advice’ and ‘more comprehensive advice’ are identical – scaled advice must comply with the best interests duty and other legal obligations for providing personal advice;
• scaled advice can include advice on a single topic or advice on multiple topics;
• the enquiries the Adviser makes need to reflect the nature of the matters they are providing advice on;
• scaled advice does not mean that the Financial Adviser who gives the advice can have lower training standards; and
• processes can be used to help an Adviser provide scaled advice, although the Adviser still needs to use their expertise and skills to deliver good quality scaled advice.

Where advice is scaled, the scaling must itself be in the client’s best interests, especially since the client’s instructions may at times be unclear or not appropriate for his or her circumstances.

ASIC has publicly acknowledged that consumers want improved access to affordable, quality advice and that those who regularly access advice make better financial decisions over their lifetime. In November 2020, ASIC renewed its efforts to promote access to advice, commencing a consultation on the impediments to providing affordable advice, including limited advice. The regulator has also recognised that people do not necessarily want or need to deal with all their potential financial goals simultaneously or continuously.

So how does the industry achieve scale compliantly when it is already struggling under the weight of regulation? One answer could be properly executed digital advice augmented with human financial advisers.

————————————————————————————————————————————————————————————————————————————

For information email: info@fourth-line.com.au

Fourth Line is a rigorous RegTech risk management and compliance system for advice practices, dealer groups and other wealth management participants. Fourth Line uses algorithmic approaches to simplify the complexity in advice reviews whilst maintaining human oversight, empowering compliance teams to coach and develop strong advice behaviors through data driven insights from advanced analytics for adviser, practice/dealer group and industry benchmark comparison with centralised document storage and access to meet regulatory needs.