The financial services sector is currently undergoing a dynamic transformation. One of its most important factors are the technological changes. The implementation of technological innovation in the retail financial services — and especially in fields such as payments, insurance products, loans and investments — occurred through the creation of start-ups, which are more flexible and oftentimes cheaper than the services offered by traditional financial institutions. Services of this type include insurance technology (insurtech), regulatory technology (regtech), and robo-advice. They are not subjected to supervisory regulations as strict as those applied to traditional financial institutions, and are often even entirely excluded from such regulations.
Robo-advice services for everyone
As part of its works on the identification of barriers to the development of the Polish fintech market, the Polish Financial Supervision Authority (KNF) has defined robo-advice as a form of automated financial advisory that is used, among others, in the areas of investment services, loans, and insurance. This solution is based on advanced algorithms with the use of artificial intelligence technologies and tools for the analysis of Big Data. Robo-advice reduces the cost of financial advisory services, as a result of which these services can be made available to a wider range of customers.
The application of robo-advice in investment markets involves the generation of the so-called “transaction signals” concerning financial instruments. Tools with built-in algorithms, which are made available to clients by investment firms, serve as “advisors” with regard to the parameters of the transactions being concluded. The investment order is not automatically activated after the transaction signal is generated. Instead, the customer has the opportunity to conclude the given transaction in accordance with the received signal. The domestic and European Union legislation governing investment advice services does not distinguish between “traditional” advice services and advice services provided with the use of technical solutions. These regulations are “technologically neutral”. We must remember, however, that it is the investment firm that is ultimately responsible for the way in which the services are provided to the client, that is, the so-called “end result”. This means that it cannot absolve itself of the responsibility towards the customer by indicating that in the provision of its services it was using technical solutions supplied by another entity.
The homeland of robo-advice is the United States, which is the largest financial advice market in the world. Other leading countries include China, United Kingdom, Germany, and Canada. The robo-advice systems are not identical, and as a result of their evolution three main types have emerged — informational, supplementary and standalone robo-advisors. They differ in the range of tasks performed for the client, as well as the scope of the intervention in the customer’s final decision.
From online comparison sites to automated solutions
Robo-advice is the result of the second wave of digitalization in the area of financial consulting services and marks the transition from online comparison sites to automated solutions based on algorithms and AI. Meanwhile, the first wave of digitalization of financial consulting services represented a transition from traditional advisors to online comparison sites. The emergence of robo-advisors came in response to the limitations of traditional investment advice, which required the advisor to hold a certain minimum amount of assets and were too expensive for the less wealthy clients. Robo-advice usually eliminates such minimum requirements, and thanks to the use of automation and AI it also removes the barrier of accessibilit,y and is much cheaper than traditional advisory services.
The solution most commonly found in developed robo-advice markets is a hybrid model, where the robo-advisor is responsible for the time-consuming technical side of the contact with the customer, associated with the acquisition, analysis and interpretation of information obtained from the customer. The final recommendations are formulated by a traditional financial advisor who is able to devote more time to developing their relationship with the customer.
Robo-advice isn’t without its flaws — like any automated solution, it doesn’t always correspond to the individual needs of the customer and doesn’t provide the personal relationship necessary in advisory services. A full automation could lead to a situation where the more complex needs of the customers are not properly addressed. The identified disadvantages of robo-advisors support the view that in the future we should expect symbiosis, and not competition, between traditional and automated financial advisors.
Studying the robo-advice system
The Polish robo-advice market is very young and is still in the initial phase of development. This is evidenced by the scale of this market, which is measured by the value of assets under management, the number of users, the value of assets per user, and the market penetration rate (the share of active customers in the given market’s total population for each year). The value of assets under management by robo-advisors is expected to rise from USD24m to USD498m, while the rate of growth is expected to slow down from 130 per cent to 29 per cent in the years 2018-2023. Similar trends of decreasing growth in the value of assets managed by robo-advisors are observed on the global scale, where during the same period it will decrease from 126 per cent to 14 per cent.
The market penetration rate is negligible but exhibits an upward trend from 0.01 per cent in 2017 to 0.18 per cent in 2023 — in the same period the global market penetration rate will rise from 0.2 to 1.9 per cent. In addition, according to projections, in the years 2017-2023 the number of users will increase from 3.6 thousand to 68 thousand, and the value of assets per user will steadily grow from USD6 700 to USD7 300. When it comes to the global market, the value of investment per user is almost 3 times higher.
Pros and cons
All the data and arguments presented in the analysis support the view that robo-advice doesn’t pose a threat to traditional financial advice. Instead, it is simply a tool that facilitates certain processes and is used by traditional financial advisors in the provision of services to customers. This would point to a further development of the hybrid model of financial advice.
This hypothesis is also confirmed by research conducted by the author among certified traditional financial advisors (holding the European Financial Guide and European Financial Consultant certificates), affiliated at the European Federation of Financial Professionals Poland. The survey was carried out under the auspices of this organization and had a form of an electronic survey completed by users in the period from March to June 2020.
The traditional financial advisers were asked whether robo-advice was a threat. Almost 53 per cent of the respondents indicated that it wasn’t, while 47 per cent believed that, in fact, it was. The advisors were then asked whether robo-advisory could serve as a support tool for traditional financial advice. More than 68 per cent of the respondents think that it could.
The next question concerned the prospects for the development of robo-advisory services in Poland. Almost 58 per cent described them as positive. Among those who described them as negative 36.8 per cent respondents said they are rather negative, and 5.3 per cent as definitely negative. In light of the global trends associated with the use of robo-advice by traditional financial advisors, the respondents were asked whether they agreed with the statement that the future would belong to the hybrid model in which traditional financial advisors are supported by robo-advisor in the provision of services for the customers. Almost 58 per cent of the respondents agreed with this statement.
The most important benefits of robo-advice indicated by traditional advisors included the low cost of services (57.9 per cent), high availability of services (47.4 per cent), the opportunity for passive investment (26.3 per cent), and the low level of required investment amount (10.5 per cent). At the same time, the most important disadvantages of robo-advice indicated by traditional advisors included the incomplete adaptation to customer needs (73.7 per cent), lack of contact with a human being (63.2 per cent), consumers’ low levels of confidence (52.6 per cent), low levels of transparency (42.1 per cent), and the limited offer (26.3 per cent).