With the individualization of the pension market, the need for many Dutch residents to take action regarding their retirement income is becoming more and more urgent. As pensions sector-insiders at IG&H we see many parties taking on this ‘retail pensions’ challenge. For instance by giving the costumer personal insight in their future earnings. One of the ways to do so is by robo-advice.
In a series of blog posts about robo-advice, we will investigate this phenomenon, we will discuss supply and demand and we’ll give you our view on this market. Although robo-advice can be used for different goals, in these blogs we will focus on the financial advice about income after retirement.
Episode 1 – Is the market ready for robo-advice and what determines the quality of the advice?
An increasing number of financial service providers are committing themselves to robo-advice. From start-ups to retail banks and insurers. Anyone who is still questioning the rise of robo-advice, only has to look at the actual search trends in Google (see figure 1). Currently, the focus of this development seems to lay on investment advice. In the United States alone, the estimate is that by 2020 2200 billion in assets will be managed through robo-advisors; that is over 5% of the total invested capital in the US. All in all, robo-advice seems to be ‘the next big thing’ in the financial sector; but is it really? And what will be the benchmark for comparing the robo-advisors?
Robo-advice on the rise
The growing international interest in robo-advice stems from developments in four areas: consumer, provider, technology and regulations.
First of all, there is the costumer need. Because of the increasing individualization, e.g. through gradual dismantling of the welfare state, consumers are more and more on their own with regard to their financial security. With this responsibility come complex choices, and the customer will need help. In a world where the smartphone is used for nearly everything, digital and easily accessible support for tough financial choices is a necessity. Many consumers find the traditional financial advisor too expensive after all.
Secondly, financial service providers themselves are looking for new ways to generate value for their customers and – not least – for themselves. They are part of a mature, low-interest market where it is ever more difficult to distinguish themselves from competitors because of increasing transparency. Margin erosion poses a serious threat. In the struggle to bind customers and to lower acquisition costs, many financial service providers are discovering the possibilities of forward integration, towards digital financial advice.
Thirdly, technological developments, for instance in the fields of artificial intelligence, predictive analytics and the decreasing costs of computing power, have accelerated. This lets financial service providers develop valuable digital applications sooner and better. Furthermore, a number of ‘off the shelf’ robo-advice technologies have entered the market, such as WealthObjects, Advizr, Schantz en Pefin, putting the realization of robo-advice services within reach for many financials.
Finally, new legislation is giving an impulse to the availability of consumer data. Under PSD 2, providers are required to share the customer data when asked to do so by this customer. This means that the completeness of the data on which the advice is based will increase, further increasing the value of the advice itself. This is an extra trigger for many financial service providers to jump on the band wagon.
Three factors determine the quality of the advice
Robo-advice offers potential for different financial issues, for example mortgage advice, investment advice or integrated financial advice (financial planning). What these different types of robo-advice have in common is their intended purpose; helping customers solve a complex financial question. How do I make sure I have enough income after retirement? Which mortgage suits my personal situation the best? Etcetera. However, the added value of many current ‘robo’ advisory solutions in the market is still limited. Based on different questions, they give the consumer an overview of and insight in their financial situation, but usually do not give advice. Moreover: what actually constitutes high-quality robo-advice?
As far as we are concerned, there is only one benchmark for quality, and that is the customer value of the actual advice. This customer value is influenced by three factors:
- Ease: how much effort (e.g. time, money, thinking) does it take the customer to get his or her advice?
- Personalization: to what extent does the digital advice fit the unique personal situation of the customer?
- Direction: Is the advice unambiguous, specific and clear about what action the user should take next
These three factors should be seen as the legs of a stool; when one of the three is not on level, the stool is crooked and will serve its purpose. This level is influenced by properties of the tooling that is used, such as the interaction design, the (data) input for the advice, the business rules and the used technology. Furthermore, there are a few preconditions for success that strongly depend on the provider; the trust that the public has in the provider, the reach and user volume that the provider can generate and the consumer data that the provider can tap into. If a provider does not score well on these preconditions, its tooling will never fully gain traction, no matter how good it is. After all, a stool will still not be very comfortable, if it is has three strong legs set on an uneven floor.
The practice proves difficult
The pros and cons are a daily struggle for our customers. How do I create accessible, easy-to-use tooling, that still gives thorough advice? Do we choose ready-to-use business rule technology, or do we investigate the possibilities of AI? And how do we make sure that the tooling we create now is also future-proof? These considerations are often further complicated by a complex legal framework, that is still strongly founded on human forms of advice. Just recently this was supported by the Dutch Authority of Financial Markets (AFM): digital advisory tooling should not get too much room to grow, because they are hardly ever truly objective and comprehensive in their advice, which can be harmful to costumers.
To investigate this claim further, we will dedicate the next blog post to the lessons that we learned about robo-advice tooling and we will review the current market offering on the basis of the three-legged stool. Until that time, we are curious to hear from you, which parties you think excel when it comes to ease of use, personalization and direction? Who do you believe are the current winners of the robo-advice market, and why?
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This is a blog post by IG&H in the topic ‘retail pension’. Intensive specialisation in the banking, insurance, pensions, healthcare and retail sectors is what makes IG&H a genuine sector insider. We regularly apply knowledge and concepts from one sector to another. And this is precisely where our strength lies. Specifically for the pension sector, we help our customers with strategy, design and implementation in the area of retail pension, distribution and PenTech. Contact us for questions, or look for more information here on this website.