CFP Board has published a white paper featuring key findings and takeaways from the recent 2018 Digital Advice Working Group meeting, with the goal of mapping the broad ecosystem that has evolved around the concept of “digital financial advice.”
CFP Board formed the Digital Advice Working Group in 2016, with the stated goal of examining the five-year outlook for digital financial advice and to create greater clarity around the changes and implications for the profession. The working group then reconvened in 2017 to compare these predictions with their own experience over the past year, identifying key areas of uncertainty and forecasting where the industry may be headed.
The new paper’s authors are Jarrad Roeder, principal, Heidrick Consulting; and Eric Skoritowski, a consultant with the firm. According to their analysis, several key pressures continue to shape the market for digital financial advice: “Preservation of [the quality of] advice [being delivered] at scale, client demand for digital solutions, regulatory pressure, fee compression, and the increasing longevity of investors.”
“In order to alleviate these pressures, major players in the FinTech space are developing digital solutions that drive mass personalization through scalable and intelligent advice platforms,” the paper explains. “Core to this process is continuous improvement, building in capabilities for A/B testing, and real-time feedback loops to test different strategies for different customers.”
According to the paper, both clients and advisers are being tapped to provide valuable and instantaneous feedback on technology as it is deployed, which is helping solutions to reach greater scale and deliver a more seamless user experience.
“Overall, these digital solutions aim to provide better quality financial advice to a greater number of consumers,” the pair write. “Where does today’s technology leave opportunities for growth in the future? One opportunity area identified by the working group was decumulation, particularly as an aging population drives the need for more and more effective decumulation services.”
The paper authors cite previous research from FINRA’s Report on Digital Investment Advice, which revealed that the majority of digital advice providers do not independently address decumulation today and that virtually all digital advice providers believe that some level of human involvement is a necessary component of decumulation services.
“The group did see some digital platforms for advisers and investors beginning to help users work through the complexity of decumulation by providing a more holistic view of financial health (e.g. via account aggregation, investment management, and cash flow analysis),” the report says. “Yet the group emphasized caution given the large scale of success or failure in decumulation as these solutions are scaled.”
The authors cite one working group member who warned that, “if digital advice providers get it wrong, they get it wrong for lots of people. If digital advice providers get it right, they can successfully deliver low-cost advice to a large swath of investors.”
“Before scaling decumulation solutions to the mass market, the working group felt it imperative that these approaches be ‘beta tested’ and that a common framework and approach for decumulation be developed,” the paper says. “As more stages of the financial planning process are automated, advisers will have greater opportunity to drive deeper conversations with clients and play larger roles in clients’ financial lives. In today’s environment, all advisers already operate somewhere along a spectrum of digital enablement.”
Looking toward the longer-term future, the working group predicted the industry could see the development of the necessary technologies to enable fully automated, direct-to-consumer, holistic financial planning without a human adviser as soon as 2023.
“Still, despite the availability of the technology, most working group members believe that advisers will remain the primary conduit for providing financial advice to clients even when fully automated solutions exist,” the report concludes. “How clients will respond to those services is still highly uncertain, as is the effectiveness of digital tools vs. a human adviser in effecting the actual behavioral changes that lead to financial health.”
Looking to the deeper future, the working group members speculated that conversational artificial intelligence that can move beyond today’s relatively simple call and response mechanisms—the way Siri or Alexa operate—would be a fundamental game-changer for supporting provider scale across the advisory industry.
“As conversational AI advances from one-turn questions, it has the potential to surface consumers’ core problems from their questions more quickly and efficiently, potentially automating the time-intensive fact-finding process in financial planning,” the paper says.