Figure 1: Factors influencing growth in financial advice.
This is a unique opportunity for financial institutions like banking, super annuation and wealth management firms, as most of these entities offer advisory services through licensee organizations or independent financial advisors. However, with post-Royal commission interventions and amidst consolidation within the Australian wealth and super industry, over 9,000 financial advisors have exited the markets. By 2023, these numbers are expected to drop further, from 19,000 currently to 13,000, representing more than a 50% decline from 2018. This abrupt exit has created a significant supply-demand gap for existing customers, licensees, and associated institutions. That gap is likely to increase further by 2030, with Australia’s population expected to reach thirty million, and only seven million people expected to have access to a financial advisor
In addition to the supply-demand gap, the cost of financial advice offered by human advisors has also grown by almost 30% in the last two years, to the present median fee of over $3,000 a year4.This high costs is unviable, as it limits the scaling of financial advice in human-advisor centric models. The scarcity of advisors and high cost of advice present a unique opportunity for financial service providers to pull ahead by providing universal access through a technology-enabled digital financial advisor.
The necessity of an affordable financial advisor
Affordable financial advice is an integral part of providing personal financial planning services to customers. Hence, it is a good time for financial institutions like bankers, insurers, wealth services providers, and super funds to develop affordable and scalable financial advice as a strategic area and focus on developing capabilities for robo- advisory.
While automation and robo advisory services are the two major trends governing the strategic orientation of financial institution, several market leaders have adopted robotic process automation (RPA) to automate statements and routine transactions, which helps optimize cost and establish automated processes. However, in contrast to implementing automation initiatives, digital robo advisor require a more strategic approach as it offers both opportunities and challenges, which demands due considerations (Figure 2 below).
At one end, robo advisors can significantly cut costs and increase scalability. On the other hand, the cost and effort required to develop a digital robo advisor capable of providing personalized “human-like” financial advice is significant.
The short-term business case for robo advisors may not be immediately justifiable and is a likely limitation. Firms should therefore adopt a more holistic approach that focuses on developing robo advisor services strategically and gradually.