Plenty of firms wax lyrical about their commitment to digitalisation. And while many financial institutions have adopted mobile banking and other smartphone-available tools, few have embraced the technology as thoroughly as ’s wealth and asset management division. The company’s global network encompasses key financial centres in the Americas, Asia-Pacific, Europe, Middle East, India, Africa and Japan. Globally it employs more than 15,000 professionals, including more than 1,100 partners with deep technical and business experience.
World Finance spoke to Paul Stratford, Executive Director at EY, about how it is steaming ahead in technological innovation in the finance industry and, more specifically, about the company’s work in automated financial and robo advice.
How would you define robo advice at EY?
There are different views and perceptions of robo advice and the size of the footprint it occupies on the value chain, but we would define a robo advisor as a class of financial advisor that provides portfolio management online, using algorithms designed to determine needs and make a recommendation with minimal human intervention.
The term ‘robo advice’ has quickly evolved to cover upwards of 80 automated advice and investment solutions globally at the time of speaking. But the underlying principle is the use of a formula, or set of rules, to assist a customer in finding the optimal approach to their investments, savings, retirement, or protection of assets.
How does robo advice work in practice?
In practical terms the current market for robo advice can be split into three distinct groups: fully automated non-discretionary investment advice; self-service investment and financial advice; and guided investment and financial advice.
Fully automated non-discretionary investment advice refers to an individual subscribing to wealth guidance and advice that is implemented without the customer’s explicit consent.
Managed accounts fit this definition and dealer group model portfolios could probably be put here as well, particularly if the portfolio is rebalanced periodically without customer consent at each rebalance.
The term ‘robo advice’ has quickly evolved to cover upwards of 80 automated advice and investment solutions globally
The main distinction between these investment approaches and the new crop of robo advice offerings is that the new kids on the block advise the customer on which fund or portfolio to invest in. Traditional managed accounts, on the other hand, rely on an advisor to select the initial portfolio based on their clients’ personal circumstances and appetite for risk.
The new breed of automated investment solutions still apply the principles of diversification, passive investing and regular rebalancing. Many also offer extended tools, including tax lot harvesting, to optimise capital gains tax outcomes. What really sets them apart though is an intuitive, clearly defined and consistent investment approach that resonates with experienced and novice investors alike. As these solutions continue to innovate, they will increasingly appeal to a wider audience.
Self-service investment and financial advice refers to the provision of digital tools to support customers in identifying, scoping and creating wealth advice and guidance, typically in relation to a specific goal or range of goals, such as an income stream in retirement or savings for education. They may use behavioural finance techniques to encourage customers to regularly monitor and contribute to their wealth journey. Some of these tools build on this further by streamlining the goal-setting process, and providing default goals and timings.
The main difference between these robo advisors and the automated investment options is that they optimise and allocate cash flow across many goals. Optimising across goals is particularly difficult given that across different countries there will be the complexity of income tax and pensions systems. As an example, one question that sounds simple but is quite difficult for robo advisors to answer could be whether a client should make voluntary contributions into a pension scheme or pay down the mortgage. If a robo advisor can’t answer this fundamental question, then chances are it optimises on investment and not on strategy.
What makes these types of robo advisors even more compelling is the aggregation of client data. This enhances the user experience and removes unnecessary friction from the goal-setting process. Where the wealth manager already has personal and investment data for the user, it can be integrated into the tool. Alternatively, the front-end tool could request the user’s various account details.
This gives the robo advisor a powerful advantage as it can link all the accounts together, monitor movements in the investments and track ongoing progress towards goals. At the very least, the robo advisor could apply basic user information, such as their age and suburb, and provide an estimate of their income, expenses and assets.
The guided investment and financial advice is focused on holistic strategies. It includes traditional face-to-face advice, as well as remote advice delivered over the phone or by video. It also includes omnichannel advice, where a person is involved or ultimately responsible for the advice strategy.
There are a number of services available that provide online tools and access to a financial advisor for a one-off initiation fee and low monthly charge. These providers have embraced a user-friendly and simplified approach to the financial advice process, with some even offering automated investment advice supported by a real financial advisor.
Are traditional wealth managers right to see robo advisors as a threat?
Will robo advisors replace real financial advisors? The answer is, probably not. The more likely scenario is that robo advisors will complement the work done by real financial advisors.
Where the two worlds are more likely to collide is in an advisor-led robo advice tool becoming part of customer service process. This would mean robo advice being part of omnichannel servicing. This has real merit and could revolutionise financial advice based on the principles of customer-centricity, connectivity, contemporariness and compliance.
Another key area of technological transformation is blockchain. How might this revolutionise financial services?
Alongside robo advice, blockchain does offer a number of revolutionary changes to financial service. It is a technology that allows multiple parties to share data in a trusted environment, creating a single source of truth. If blockchain was used in financial services to record ownership of assets and trading of assets, then it could eventually become a single source of truth for all financial transactions.
Instead of each party keeping their own record of events, blockchain allows all parties to access the same definitive record. In this respect, it could revolutionise the operational processes in financial services, which are heavy on data reconciliations and data error handling. This is why Santander estimated $20bn in costs could be saved per year by implementing blockchain across financial services.
Payments and post-trade settlement are just one area of use cases for blockchain, but there are many more that are only just starting to be explored – for example, sharing of KYC data, fund transfer agency and trade finance. At the same time, however, blockchain is not the answer to every problem. The technology is only useful in cases where data needs to be shared between multiple parties, and trust is needed that the data cannot be changed unilaterally.
Blockchain is seen as being useful in boosting transparency. How so?
Probably the simplest way to understand blockchain is to look at four elements: distributed data; consensus; immutable record; and trust. In terms of distributed data, a blockchain is a database that is distributed. There is no central store of the data; instead, all participants hold a local copy.
Firstly, there must be consensus. To update the blockchain, a participant can suggest an update by transmitting it to all other participants. Updates are accepted into the data using a consensus method – usually some or all participants checking that the update meets some pre-agreed validation criteria. That way, no party has control over the data.
At the same time, an immutable record is vital. Each data update to the blockchain essentially forms a transaction – and each transaction is bound to the transaction before it using cryptography, operating in such a way that transactions cannot be edited or deleted after they are accepted to the chain. In this way, blockchains create immutable records that cannot be changed by a single participant. The only way to amend the data is to create a new data entry via the consensus method. This creates trust in the data.
It is worth noting that, while all blockchain data is distributed, it is not always accessible by all participants. Blockchain data can be encrypted or permissioned to limit access to data, so while blockchains can generate trust in the data, it need not always increase transparency.
What’s next for EY and its work in digital?
We plan to continue helping firms with not only the design, but also the implementation. Key areas to get right in the adoption of digital are ‘emotional design’ and the customer journey.
Emotional design is about designing the target experience to go beyond functionality and engage with the consumer on an emotional level. Within financial services, online sites and apps, there are clear examples of emotional design in practice. Going beyond grabbing the attention to deliver effective guidance, and making it memorable by building a relationship.
Putting the customer journey at the heart of your digital proposition is critical to success. There is a need to focus on end-to-end customer journeys rather than discrete transactions. This is an area where we have built up extensive capabilities and are working with global firms on the next stage of their 21st-century development.