Automated investment advice trends

By 1 September 2017Posts

Automated investment advice gains traction

By Louis Eksteen

At Twisted Toast we are proud to be the technology provider to SmartRand™, South Africa’s first automated investment advice product, commonly know as a robo adviser. Since creating SmartRand as a stand-alone product, we have enhanced the technology with our partners Galileo Capital to now be able to offer third parties a robust, compliant backend API (SmartRand Engine), for use by financial institutions.

SmartRand Engine powers the innovative new automated investment advice system Absa Virtual Investor. The launch has been a great success. By now SmartRand Engine has already successfully processed more than 1 000 individual advice transactions on behalf of Absa. Funds under management generated by the system has exceeded expectations. Plans are in place to move the product forward, now that it has proved itself in the market.

The Enhanced SmartRand Engine product will enable straight-through processing of all investment advice and fulfilment. This means the end of clumsy form completion, long waits and awkward administrative tasks, just to be able to invest once-off or on a monthly basis in an individually appropriate investment fund.

Consultancy firm Deloitte is studying automated investment advice trends globally and have recently commenced their South African research project. We are participating in the study and are sharing our experiences in this nascent industry.

Deloitte’s study about automated investment advice in the UK makes for interesting reading, as a number of trends are similar to what we have seen locally. The main conclusion for the UK market Deloitte comes to is: “…the UK offers a rich opportunity for automated advice. There is a significant ‘advice gap’, driven by the high cost of advice, low financial literacy, low engagement and a lack of trust following past instances of mis-selling.”

We suspect the South African study will reach a similar overall conclusion. It has already basically been proven that a strong automated investment advice tool with the right underlying rules and algorithms, with a simplified mandate (single goal investment advice), will constantly beat human advice due to its consistent application of appropriate advice.

The Deloitte UK study also indicates a positive trend regarding the growth of automated investment advice: “With individuals being increasingly tasked with managing their own pension provision and in the context of a relatively low state pension, automated advice can play a key role in generating low-cost solutions. Our survey research points to a sizeable pool of potential adopters in each of the markets we examined.”

With SmartRand, one of the most interesting learnings we’ve had is the fact that, contrary to popular belief, it’s not the so-called millennials who are flocking to automated investment advice. It’s not the youngsters glued to their cell phones and Insta-sharing while dabbling in the receipt of automated investment advice. No. Our experience shows it’s the older generation who have really taken to the opportunity of receiving quick, appropriate and cost-efficient advice.

The Deloitte UK study also found the following: “Overall, our survey analysis suggests that up to 15 million GB adults would be willing to pay for automated advice in at least one market. However, demand varies considerably by consumer segment. At a macro level it is: • high among consumers in their early forties, despite the fact that this group is often considered to be less enthusiastic about new technologies than millennials • high among those with above average income, despite the fact that this group is more able to afford traditional financial advice than those with average incomes • consistent, overall, across wealth levels with the exception of defined contribution (DC) pensions, where appetite for automated advice is highest among those with the smallest DC pots.”

After reading the Deloitte UK study and while participating in the local leg of the research, we’ve become truly excited all over again about the long term prospects for automated investment advice.

Like so many other disruptive technologies, the short term impact of automated investment advice is probably over-estimated, but its long term impact is hugely under-appreciated.