The rise of robo advice will no doubt have more than its share of victims; there’s no such thing as a bloodless revolution, after all. But, IFAs do not need to be among them.
The 2012 Retail Distribution Review and subsequent regulatory developments have undoubtedly made life more difficult for those working in this industry. In the ensuing confusion, robo-advisors have capitalised on the introduction of more stringent rules – at the expense of traditional advisors.
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But IFAs don’t just have a place in the new world of low-cost, high-volume financial advice: they have several distinct advantages.
If you’re an IFA, you can survive – and indeed flourish – in a landscape increasingly dominated by robo-advisory firms. But you need to know where your strengths lie, and how you can make the most of them.
Here are the three key advantages IFAs have over robo-advisory firms.
Experience
Robo-advisory firms don’t have enough history to be fully trustworthy. If that sounds harsh, it’s also true. How can an investor rely on an algorithm to navigate a financial crisis when it’s never been through a financial crisis? How can ‘black swan’ events be predicted and accounted for? Ultimately, how can software be effectively substituted for experience?
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Ultimately, it can’t. The downfall of firms such as Long-Term Capital Management – which attempted to base its trading methodology around a Black-Scholes algorithm – suggests that technology is uniquely ill-equipped for dealing with the unknown. As an IFA, you can more effectively defend your customers against variables such as recessions and market crashes. You have the experience, the insight, and the subject matter knowledge to provide good, safe, advice. Use it!
Suitability
Robo-advisory firms don’t sing from the same hymn sheet. Who they consider to be a cavalier, defensive, or cautious investor varies from algorithm to algorithm, business to business. One man’s devil-may-care adventurer is another’s frightened milquetoast.
Here, IFAs can be especially effective. Suitability is something better gauged by humans than robots: if an investor is trying to game the robo suitability system in order to realise higher returns, but in fact cannot afford to take a more adventurous approach, a real-life financial adviser is better placed to sniff them out and stop them from making costly mistakes.
Customers
Relationships are only established through experience – and here, robos can’t quite measure up. That’s why many are spending millions on marketing. They’re after your customers, and they’ll be as aggressive as possible in pursuit of their business. Don’t give them up without a fight. Start your own marketing campaigns, woo new customers, reactivate those lost to RDR, and consolidate your relationships with existing ones. Show that you value their business, and they’re less likely to take it elsewhere.
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The post-RDR environment may be difficult, but it is habitable. Keep these advantages in mind and tailor your services to capitalise on them and you’ll regain any revenue lost to robo-advisors – and then some.