Whether it’s Skynet or the Matrix, we should all keep an eye out for the [impending?] technological singularity. Mankind’s obsolescence at the hand of ultra-smart ‘machines’ driven by self-aware artificial intelligence shouldn’t be considered science fiction or an edge event – according to some. One would hope that the machines will look benevolently upon the crude, redundant biological beings that created them. Nietzsche would probably disagree. This Dystopian view might be correct. Alternatively, AI could be successfully and sustainably developed to provide long-term agency utility for us, growing our civilisation. Either way, the tech choices we make in the near term will define our future.
How far down the road are we? Ironically not very far, if self-driving cars are used as a benchmark. Many predictions emanating from the early noughties posited that we would already be living in a fully automated motoring Utopia by now. The tech has been a challenge, but agency has proved to be a major stumbling block: If your self-driving car crashes, who is responsible? Other applications of AI (and more specifically, machine learning) continue to layer into our lives. These range from predictive text in email and messaging apps to providing us with more sophisticated healthcare. So far one might conclude that AI has successfully been implemented to improve and expand many existing products and services without necessarily creating any new genre-defining niches of its own.
One sector that many felt would pioneer AI is financial services. The reality is that, again the impact so far has been limited and/or hasn’t manifested as expected. In the engine room of finance, the trading floors of the banks warehousing risk, there has been something of a sea change. Ten or more years ago, relatively large teams of human traders were responsible for managing this risk on behalf of the banks, their shareholders and ultimately us, the consumers. Now after a financial crisis or two, much of the heavy-lifting is automated and is in the ‘hands’ of computers. The remaining humans are as much software engineers as they are risk managers. Given the criticism of the ‘casino’ culture which dominated the industry historically, senior executives and regulators can sleep a bit easier knowing that trading is broadly procedural and auditable.
However, smart machines were always supposed to dramatically change the way we directly engage with financial services. In the UK, the FCA tipped financial advice provision on its head in 2013 when it implemented the Retail Distribution Review (RDR). The core goals were broadly welcomed: Remove commission bias, increase skills and education and rationalise consumer choice. The regulator was aware, which some have retrospectively questioned, that its implementation would widen the advice gap. Indeed, it created a new regulatory regime dubbed ‘Simplified Advice’ that was presented to solve the problem. As such, it was an invitation to create a new generation of automated, or robo-advisory solutions to fill the void.
7 years on, the Simplified Advice regime lays largely forgotten and pretty much unused. ‘Robo-advisory’ services and platforms have veritably erupted in the past few years. However, these solutions are, in the main, digitalised versions of traditional products offered in sister channels: They have succeeded in widening the scope and lowering the cost of entry/ownership for both discretionary wealth management and execution-only products. The core advice space remains largely untouched. Those specifically requiring financial advice continue to be offered a papered, human intermediated service that would look very similar now as it did a decade or more ago. ‘Robo-advice’ has so far proved to be a misnomer.
Why do humans continue to reign supreme in the advice channel? A couple of factors come into play here: Firstly, advice consumers have absolutely continued to show a preference for the traditional advisory product. Advice demographics point to at-retirement as being the most popular juncture to seek financial advice. Folk in that generation are digitally aware and active but have not been habituated to using digital services for a critical service provision. Secondly from an industry perspective, regulation governing financial advice is nuanced and firms have struggled to get their heads around on how to build compliant and profitable digital advice solutions. Sadly, this reality has led to most high-quality advisory firms raise rather than lower their thresholds. This leaves paltry options for those seeking advice on the lower end of the wealth scale.
Change could be afoot. As we’ve highlighted in previous blogs, COVID-19 is shifting landscapes in all aspects of our lives and the marginal attraction of digital solutions will continue to increase exponentially. Notwithstanding COVID-19, investment and innovation in financial AI has continued apace. The next generation of tools and services in the wealth space will be equipped to meet different challenges. Cost control is an inexorable battle in the race to serve the underserved in the advice space. One doesn’t need to be a business model visionary to realise that automation significantly lowers costs, thereby supporting greater inclusion. Technology can fundamentally solve more complex problems now than even just a few years ago. Progress in fields such as Natural Language Processing (NLP) are vital in bridging the gap to further operational robotisation. An era of genuine Robo-advise could be about to dawn.
So, should human advisers be anxiously checking their CVs for transferrable skills? Absolutely not, in our opinion. Whilst technology will continue to dramatically shift the sands in financial services provision, we believe humans will continue to play a vital role. The art in delivering the next phase of wealth journeys will be to elegantly knit together man and machine in order to create a new generation of products. These can solve the inclusion, engagement and outcome orientated problems that continue to build in incumbent verticals. In the short and medium-term consumers are very unlikely to see a pure Robo solution as being sufficient for their needs: Firms must recognise the emerging dichotomy of humans concentrating more on the empathetic and emotional engagement needed, whilst accepting that machines can broadly do a better job of the heavy-lifting.
We think Cyborgs will win out in the battle for the hearts and minds of the next generation of wealth customers. Mercifully, no lobotomisation or bionic implants will be needed. Human advisors will be empowered, not replaced by AI fuelled solutions. Consumers will welcome a new generation of services which more holistically meet their demands from financial services. In the end, the robots may take their revenge but until then we should expect tech to continue be a catalyst for positive change in finance in the years to come.