The Future Of Financial Planning

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The arrival of robo-advisors on the financial services scene in South Africa is expected to have a significant impact on how South Africans invest their money and plan for their retirement.  

We can book accommodation, get a taxi, have food delivered and watch movies – all conveniently from behind a tablet or smartphone. Now we can do the same with our financial planning.

The arrival of robo-advisors in South Africa means that individuals no longer have to go through cumbersome (and costly) meetings with financial planners to make an investment or organise their savings into a portfolio.

There are many advantages to using the new robo-advisor technology, says Obeid Mahomed, a lecturer at the African Institute of Financial Markets and Risk Management (AIFMRM) at the University Cape Town (UCT).

Mahomed is currently overseeing research by UCT students into the robo-advisory field, which will include a survey of about 50 investors to determine their appetite for the digital platform and any teething problems in the industry. AIFMRM offers two Master’s degrees in Risk Management and Mathematical Finance.

“Robo-advisors make for a very exciting research topic,” says Mahomed. “It will be able to shed much light on how this new technology can be used in South Africa.”

He adds, “Whatever device you use, the robo-advisor makes the whole investment process very transparent. Think of it as a GPS-system for your investments.” As the traditional model is heavily reliant on the financial advisor or planner, individuals don’t always know what is going on and rely on the advisor to make suggestions. Human-based financial advice is very prone to someone’s opinion of certain investment products or aspects of the economy.

Described as the Uber of the financial services industry by Moneyweb, robo-advisors are seen as the most substantial development in the financial services sector in the US and the UK over the last few years. It is an internet-based system, which provides automated investment advice. Most also have a call centre where people can contact a human advisor for help.

In South Africa at the moment, there are three companies offering robo-advisors: Sygnia, SmartRand and Bizank. These investment companies have customised robo-advisors to provide advice based on their investment profiles – such is the nature of the robo-advisor.

The tool poses simple questions to establish the risk profile of the customer. It then suggests a personalised portfolio tailored for that individual.

Mahomed suggests that robo-advisors are especially attractive to younger investors, at whom this kind of technology is also aimed. A particularly significant area of concern in the investment industry is the fact that so many people begin saving for retirement too late.

“The tendency to save belatedly has raised questions about the models used by investment companies for decades and whether the core mechanisms they employ have been effective enough,” says Mahomed.

In the US, the better-known robo-advisors are Wealthfront and Betterment. It was reported that Vanguard, the world’s second-largest money manager, at the end of 2015 had over $12 billion under management on its automated platform (called Personal Advisor Services).

While this is not much compared to the total assets under control by these companies, it reflects the growing trend towards using automated platforms, which are aimed mainly at individuals looking at investing for retirement purposes.

Mahomed has tried the tool himself. “It is simple to use, very intuitive and also something that connects investment advice with the layman on the street. You don’t need to have a financial background to make some important choices about investment products.”

By cutting out the traditional financial advisor, there is also a cost saving, which may relate to a few basis points per annum but can be substantial over time. But will eliminating the middleman mean that the future of the traditional financial services planner is under threat?

This is a contentious issue, says Mahomed. “It is a disruptive technology, and like many similar platforms, there are risks for the industry regarding jobs.”

According to Jaco van Tonder from Investec, robo-advisors represent more opportunity than threat. “Robo-advice and technology disruption is unlikely to replace existing, established financial advisor practices completely.”
He says while some clients enjoy dealing with a technology-based option, the majority of investors will still prefer to deal with a person when it comes to parting with their money. “It will take a long time for technology to surpass an advisor in his critical role as financial coach and counsellor.”

But he acknowledges that robo-advisors have an important role to play in providing financial services. Not only can it cut down on face-to-face meetings with clients, but it can speed up certain administrative processes. Van Tonder also suggests that clients will increasingly expect their investment advisors to embrace new technology as part of the value proposition.

“The key here is that the robo-advisor is a coherent, consistent and transparent tool for individuals, allowing them to look at the range of investments that exist and letting them structure their own investment portfolio,” says Mahomed. “There is a lot of space for innovation in this field.”