- John Collett
Bank executives are among those getting excited about the use of "robo-advice" to cross-sell their products to their customers. Robo-advice is software, sometimes available as a smart phone app, which asks the user for some information about themselves such as age, income, risk tolerance, goals and then spits out "advice".
Robo-advice is being adopted by more super funds. However, unlike banks, the funds are restricted in the advice that can be given. It must be limited to information about the fund, such as explaining the risk and return trade-offs of the funds various investment options.
It may provide an estimate of how much money the fund member needs to salary sacrifice to achieve a particular retirement lump sum. The limitation of the advice safeguards consumers.
The big banks, on the other hand, provide all sorts of financial products and as part of the sell like to say that the robo-advice is "personalised" to the user.
Doubtless, the regulator, the Australian Securities and Investments Commission, is looking at robo-advice closely. But consumers need some clarification, quickly, on the following questions.
Is robo "advice" really advice in any meaningful sense?
Or is it, as much more likely, really about the banks' creating a new distribution channel for their financial products.
Sure, consumers want to get information at any place at any time. And yes, more and more people are comfortable with managing their financial affairs online.
But there is a world of difference between some piece of software recommending holiday accommodation and a recommendation that affects someone's financial future.
What if some computer algorithm recommends the wrong product? The consequences could be catastrophic.
Will it always be made absolutely clear that the recommendations are only from among the bank's own products?
While robo-advice requires the user to answer some questions about themselves, how do users know the recommendations are really based on their responses?
How can consumers have confidence that the recommendation are in their best interests rather than in the interests of the provider of the robo-advice?
And, if anything was to go wrong with the consumer losing their life savings, how much redress is available if the advice is deemed to be "general" advice rather than "personal" advice.
Personal advice is subject to much more stringent rules and disclosures than general advice.
The regulator needs to provide clearer guidance on automated product menus to help ensure that consumers are adequately protected.
Only so much can be achieved with a computer algorithm. Humans are deeply influenced by body language and facial expressions and the trust factor.
A good adviser will also be able to "read" the consumer; their level of sophistication and so on.
They should be able to talk the people who come to see them out of making silly decisions.
In some cases, the best advice may be to make or to increase salary sacrifice contributions into their existing super fund or to pay off the mortgage more quickly.
Good advice may not involve a product recommendation at all.
