Imperfect humans and perfect algorithms
Imperfect humans and perfect algorithms
Regulators and industry associations need to switch focus to the birth of the 'bionic adviser', writes Financial Simplicity's Rich Arnold.
In 1969, Loren Dunton, the man often described as the 'father of financial planning', gathered a group of business leaders in the mutual funds and financial services industry in the USA to create and fund his concept of a college for educating a new professional - the financial planner.
From that meeting the Society of Financial Service Professionals was formed in Denver, Colorado, as was the College for Financial Planning.
Shortly thereafter, the International Association for Financial Planning (IAFP) was born, the result of Loren traveling from city to city speaking with financial services professionals like myself, who he met when I was working in a small financial advisory firm in San Francisco.
I am hugely proud of the fact that I became one of the founding members of that organisation with Loren.
In 1984, as a result of herculean efforts by Gwen Fletcher, Australia launched its own IAFP organisation, which subsequently merged with other similar bodies eventually leading to the FPA as it exists today, which was formed in 1992.
Throughout the history of the FPA and its predecessor organisations the objectives of the organisation have included not only the professionalisation of the industry and the education of its practitioners, but the financial well-being of its clients.
Speaking as an early participant in this movement I found a recent editorial in ifa magazine very interesting.
I want to make very clear that I consider these objectives to be fundamental to the well-being of the nation at large, since the creation and safe preservation of a national wealth base is essential to both national security and the overall quality of life for all Australians.
It has always been a problem for trade associations and professional organisations to distinguish between their roles as industry advocates and as quasi-regulators, a role that is necessary to ensure the industry gains and preserves a reputation for service quality and practitioner integrity.
Part of the role that the FPA and its predecessors have always played has been to educate legislators and government regulators in an effort to ensure both that sensible regulation is enacted and enforced to ensure proper client protections and that industry practitioners are protected against capricious or over-burdensome regulation.
Unfortunately, governments move slowly and regulation frequently lags far behind industry trends, and as the pace of change in our world accelerates this problem becomes magnified.
Additionally, governments have both financial constraints and political pressures that often leave even sensible regulation inadequately enforced.
It is therefore often at the trade association level that professional standards need to be not just promoted but also enforced, and I therefore appreciate the need for the FPA to include this sort of enforcement activity in order to protect the reputation of its compliant members against the damage to that reputation that can be caused by less savoury individuals and firms.
Although I am Australian born I now live overseas, so it is not for me to judge the appropriateness of the FPA's specific actions in respect of non-compliant advisers, but I felt it important to speak up for the principle that quasi-regulation is a totally valid function for the association to perform.
All that having been said, let me call attention to the incredibly complex issues that are now arising as a result of the hugely disruptive innovation in financial services now taking place.
We all know about so-called 'robo-advisers', but few who do not live here in silicon valley are even vaguely aware of the pace at which the combination of big data sets, powerful algorithms and machine learning are triggering massive change across almost every industry vertical, but particularly across financial services.
Over 30 years ago, in 1982, I gave a keynote speech at the US Securities and Exchange Commission's Major Issues Conference in which I called attention to the pace at which my then employer Charles Schwab and other west coast innovators were replacing human functions with intelligent software.
In that speech I called upon regulators to recognise that in the future they would need to move away from licensing and regulating humans in the direction of licensing and regulating software!
Well now that day is here!
Regulators in Australia have quite rightly focused on some of the more disturbing facts about how our industry has historically operated and have created new frameworks around the simple concepts that fees charged should be properly related to services provided and value created, which has in turn led to initiatives to ensure full fee transparency - and fee transparency inevitably leads to fee compression.
However, it is not only fee transparency that puts downward pressure on fees.
In almost every aspect of our modern lives software disruption is creating alternative product and delivery systems to solve customer needs in new and far less costly ways than previously available.
In every market in which this happens even the consumers who do not adopt the new solution become far more conscious of their costs and start seeking better deals even from legacy providers.
So both regulatory initiatives and those of the robo-competitors are putting downward pressure on per-client revenues for financial advisers.
By my rough mathematics, we are headed towards a day where the average client wants to spend not $5,000 per year for financial advice and management, but $500.
If I am right about this, then the average financial planner will need to maintain not 100 client relationships, but perhaps 1,000!
At the same time and in similar ways, both regulatory pressures and market demands are pushing advisers to be able to offer more customised portfolio solutions for individual clients (something robo-advisers generally cannot do) and to take greater care to ensure that those portfolios are properly monitored and kept in compliance with both individual investment mandates and firm policies.
At first glance, it would seem that advisers and the firms that employ them cannot possibly accommodate these simultaneous market demands for higher levels of personalisation, higher levels of diligence, lower levels of fees and much higher customer numbers per adviser, but with automation, all things are possible!
What I believe is about to emerge to address these needs is the era of the 'bionic adviser', a human financial adviser who concentrates on building and maintaining personal relationships and structuring financial plans, armed with the bionics of an automated digital assistant who ensures that all elements of the plan are not only implemented but also properly monitored in real time.
We are already aware of digital assistants like Siri and Alexa in our consumer life, and now it is time for us to have digital assistants in our professional life as well.
Since humans are by nature somewhat flawed, it is wonderful to think of how these new bionics will overcome some of our own weaknesses and biases, and it is even more exciting to me that investment outcomes, and hence the national wealth base, will be hugely benefited by this particular digital disruption.
Now it is time for the FPA to begin considering the ramifications of these trends, both for the regulatory frameworks that will be required and for the ways in which the role and function of the FPA itself may need to change as its members move from being simply imperfect humans to being far more advanced and more capable cyborgs.
Rich Arnold is an independent director of Financial Simplicity and a veteran adviser to start-up ventures. He is based in San Francisco, California.
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