Proponents say AI will help make financial advice more accessible to more people, and reduce the high cost of advice.
Anthony Caneva, the general manager of member engagement and wellbeing at Insignia Financial, formerly IOOF, says the key challenge is trust.
“If people are going to rely on a piece of technology to help with their money, how do you deliver a solution that makes them feel they can trust it, and it’s not some faceless, soulless robot without empathy?”
In fact, the financial advice industry already suffers from a trust deficit, or at least it has done in the past.
The Hayne royal commission’s final report in 2019 catalogued misconduct in the financial services industry, much of which related to the provision of conflicted financial advice.
Part of the solution
The subsequent regulatory reckoning and tougher educational requirements led to an exodus of 43 per cent of financial advisers from the industry between 2018 and 2023. With fewer advisers available and more paperwork required, the cost of advice has been increasing.
Research company Investment Trends says the annual bill for ongoing advice was an average of $4700 last year, which many people find prohibitive.
Digital advice is clearly part of the solution.
“Independent research has shown that almost 4 million Australians say they would be open to low-cost digital advice solutions, and the digital advice sector can provide services at scale to consumers who cannot typically afford advice,” says FSC chief executive Blake Briggs.
Glenn Calder, co-chief executive of Viridian Financial Group, says attitudes to digital advice and AI range from mistrust and uncertainty to optimism for positive change on a revolutionary scale.
“We sit in the second camp and believe that it represents an opportunity to reduce the friction currently associated with financial advice,” he says.
“Like all historical technological changes it will replace many task-based, repeatable functions but ultimately will not replace the need for human interaction and therefore people in our industry.”
Making advice more accessible
Calder says the outcome will be more advice, more advisers and more Australians receiving advice.
“Some of this advice will be provided digitally and some will be automated, but at the end of the day people are complicated and value the connection they have with other people who seek to understand them, care about them and connect with them.”
A blueprint exists in the provision of medical care, Calder says.
“People have Googled their symptoms for 20 years now, but ultimately visits to the doctor have not decreased,” he says.
“We see data security and information integrity as the most important parts as we develop the next iteration of financial advice.”
Caneva says the US is leading the way in digital advice. He cites Bank of America’s LifePlan, Wells Fargo with LifeSync and JPMorgan’s Wealth Plan. They are designed to assist with financial planning, not just budgeting.
“In Australia we have robo-advisers who are able to match you with an investment portfolio, personal financial management tools that track your cash flow via open banking and tools that allow you to set specific goals for your future and see a projection of how you might get there,” he says.
“What the industry lacks is something that brings these all together.”
Caneva says some types of decisions lend themselves to digital, such as calculating how much insurance a user should buy and automatically nudging people to capitalise on tax breaks available once they reach retirement age.
“One of the missing pieces is how to give someone the confidence to better manage their cash flow so the decision to start investing is an easy one, or so a projection can be understood in the appropriate context,” he says.
“How do we overcome behavioural inertia, the fear of getting it wrong, information avoidance, and present bias?”
Get the settings right
Many home-grown robo-advice businesses have struggled and Henderson’s own enterprise, Advice Intelligence, declared voluntary administration before being acquired by GBST last July. Advice Intelligence’s major backer, Regal Funds Management, had withdrawn its investment two months earlier.
Henderson says the federal government needs to get the regulatory settings right for digital advice businesses by reducing onerous paperwork. Although banks and other financial services companies are afraid of another royal commission, AI could help avoid a repeat of consumer protection failures, she says.
“Digital advice has inbuilt legislative parameters and optimisation capability. It has the capacity to model thousands of regulatory rules, economic scenarios, complex calculations, optimise strategies and automatically produce a digital plan that can put the consumer in a better position in relation to the outcome they’re seeking. It is efficient, compliant and it is scalable.”
AI can help make financial advice even more personal, Henderson adds.
“It can assist by using data to optimise suitable strategy selection in an ongoing sense. For example, it can self-determine the most appropriate strategy and strategy values given the client’s changing financial situation and outcomes.”
Caneva says governments have used regulation to deal with past conflicts by removing commission payments to advisers and introducing the best interests duty. But, as recognised by lawyer Michelle Levy in her independent Quality of Advice Review, the documentation requirements are high.
“This is especially the case where an adviser is helping the client make the most of their existing products,” Caneva says.
“This sort of advice can be enormously beneficial and could be regulated very differently to recommendations that involve, for example, switching [products such as] super.”
Following the royal commission, former High Court judge Kenneth Hayne recommended the government review the laws and regulations around advice.
The previous Coalition government adopted the recommendation but expanded the terms of the review to include a focus on affordability and accessibility of financial advice.
Levy delivered her 267-page report in December 2022 and it was released publicly last February. In response to Levy’s recommendations, Assistant Treasurer Stephen Jones has introduced legislation to federal parliament that promises to reduce red tape but does not deal specifically with the regulation of digital financial advice.
“Digital advice is key to delivering affordable financial advice at scale to consumers, and therefore to achieving the government’s policy goals, but is hamstrung by the same regulatory burden experienced by the broader advice industry,” Briggs says.
Read more of the Wealth special report on the future of financial advice
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