The future of financial advice
Digitalisation is certainly a hot topic, and the technological change that comes with it can create new opportunities for both customers, employees and financial institutions to develop the financial sector to meet future saving and investment needs. But there are certain aspects that need to be considered in this development.
The buzz-word at the moment seems to be robo-advisors, or algorithm based advice tools as they sometimes more accurately are called. The sell-pitch is simple. Automated advice tools can be a cost-effective way to increase the accessibility as-well as the quality of financial services. It is often described as a win-win situation for both consumers and financial institutions, with financial services available at a low cost 24/7 for anyone with an internet connection.
But does everyone want to go completely digital? For example, the belief that millennials only want to engage in digital services is a myth. A recent Swedish study shows that even young people who are eager to engage in digital financial services want to consult a human advisor face to face while making big financial decisions. This is also evident in a recent Danish study, where 63% of the respondents in the ages 18-29 states that it is important for them to have a physical branch nearby. This in two countries that prides themselves with being frontrunners in digitalisation.
And even if everyone would want to digitalise their business, automatization of financial advice is not completely un-problematic. Automated advice tools are often marketed as the financial institutions budget alternative, as they usually are provided at no extra charge. This is the situation in the UK, where automated financial advice tools have increased after a ban on kick-backs for financial advisors in 2013. The cheap automated financial advice tools are mainly used by the average or low-income consumer. The qualified human advisors and tailored advice have mostly been reserved for the wealthier consumer, who can afford to pay for the service. The consequence may be that many brits will receive a low pension due to the lack of qualified and tailored advice.
McKinsey paints a gloomy picture of the future of financial advice, predicting that up to 25% of all the jobs in the insurance sector will be lost due to digitalisation. This is worrying for employees’ who risk losing their jobs if they do not get sufficient training and competence development. That the employers invest in training is crucial not only for the employees, but also for the consumers in order to obtain sound financial advice and information. With financial illiteracy rising (according to the OECD), there will be a continuing need for human advisors who, in contrast to an automated financial advice tool, can see to specific needs as-well as ask and answer questions to ensure that the consumer fully understands the advice given. Not everything can be programmed, and without the possibility of human interaction customer satisfaction could decrease dramatically.
However, the automatization of financial advice will most likely continue. If used right, automated advice tools can even ease the work of the employee and optimise customer service and experience as the human advisors could then be given the opportunity to focus on sales, customer relations and advice instead of collection and analysis of data and information. And it is crucial to remember that not everyone can or want to digitalise their business. Human advice and automated advice tools should complement, and not compete with, each other in order to ensure a trustworthy, inclusive and stable financial sector in the future.
At NFU we are of course already involved in the future of financial advice. In the beginning of March 2016 we responded to the three ESA’s Joint Committee Discussion paper on automation in financial advice. Read our full response here.