As the new age of investing emerges, advisers are forced to embrace ‘disruption’ and move towards digitalisation. It’s time to meet the more engaged consumer; the ‘hybrid’ investor, says Arnie Selvarajah.
Today’s investor is different. As an amalgamation of the ‘advised investor’ and the ‘self-directed investor’, the industry-coined ‘hybrid investor’ is more engaged and more educated than previous generations.
A hybrid is not always easy to recognise. They are comfortable with the financial basics and happy to control some aspects of their finances. They seek traditional advice on other aspects to validate their investment decisions, usually to ensure their asset allocation achieves their financial goals or tax considerations are met. Hybrids are demanding more from the industry, and seeking greater transparency from financial products and advice.
LOOKING TO THE U.S.
In the United States, the latest iteration of robo-advice takes a hybrid approach to incorporate an adviser or consultant to assist clients across the broad spectrum of needs. From guidance on how to use the advice platform, to understanding what to invest in and how to best meet their financial goals, the need for ‘traditional’ advice remains, despite the self-directed automation hype.
ARNIE SELVARAJAH
Chief Executive Officer
Bell Direct
Chief Executive Officer
Bell Direct
Stretching far beyond the basic ability to invest solely into ETFs, U.S. robo models have evolved to meet the needs of hybrids. This means robo models are now able to invest into any asset class via managed accounts. What was once viewed as fierce competition between the rise of robo and decline of traditional, we can see that not only is there room for both in the market, but the emerging hybrid market is finding value in fusion. The advice model is shifting, and it’s working.
Robo models that include an adviser or consultant, are lifting average account balances substantially. With a team of dedicated advisers, the average client portfolio has a balance of US$350,000. Compare this to a totally automated solution with no adviser inclusion, and the average client balance is US$35,000. Somewhere in the middle, where advisers or consultants are available at a call centre as needed, accounts are yielding an average of US$150,000.
The U.S. industry has successfully embraced technology, benefitting both advisers and the end client. The ability to use technology to automate the investment decision process is freeing up valuable time to focus on client acquisition and service.
With this lens, it’s clear the emergence of robo-advice is, in fact, an opportunity for traditional advisers. The intrinsic need for personal service and tailored advice can never truly be replaced by automation, and despite what the headlines claim, the advice industry is alive and well.
DIGITALISATION IS AN OPPORTUNITY
The move towards robo-advice is an opportunity for advisers to offer a tailored and personal service, through a progressive, hybrid model. There is a growing number of advisers outsourcing aspects of advice, such as product selection and investment decisions, to managed account providers. And as the Australian robo market matures, this process of outsourcing will become the norm.
In the U.S., pure-play robo is usually offered at around 20 to 25 basis points. Tailored advice can be offered on top of this at an additional 25 basis points. This means hybrid investors are facing a cost of just 50 basis points, plus the underlying management fees of the investments. Where ETFs are used, the additional cost can range between 3 and 10 basis points.
All up, the cost to the client in the U.S. is just 60 basis points. This price point has opened the advice market to a wide group of potential investors. Advisers in the U.S. can now build much-needed scale without sacrificing the value delivered to their clients.
Compare this with the costs in Australia of between 150 and 200 basis points. For the industry, this is the chance to embrace technology to help reshape the way advice is administered. It also gives the advisers the opportunity to reach the 80 per cent of adults who don’t currently access professional financial advice, because of the high cost.
But delivering digital advice is more than just creating a fancy website or elaborate solution. It’s about incorporating all the elements the hybrid breed will demand from a truly great advice model – education, digital account opening, life-cycle-focused portfolios, real-time reporting, objectives modelling with links to investment solutions. And the list goes on.
There’s no time like the present for advisers in Australia to look to the U.S. and learn from the successes. It’s time the industry changed its perceptions of disruption. Instead, let’s consider it help, rather than a hindrance, in the way we deliver client service and prove unquestionable value.
Arnie Selvarajah is Chief Executive Officer of Bell Direct, which powers Desktop Broker, an innovative solution developed exclusively for financial advisers.