We don’t want to give up control of our money but we trust the internet to guide our own control. But about as many do not trust technology at all and so may be the same people who overwhelmingly trust their own bank as the preferred source of the information or advice they need.
This is one way to read the results applicable to the UK of a survey by ING of some 15,000 individuals in 15 countries when asked about their preferences in the area of financial decision making, as part of a broader survey of mobile banking and ‘new technology’. The UK is not an outlier in any of the survey responses.
ING itself pointed to the importance of a common behavioural characteristic of ‘wanting to be in control’. ‘Understanding how people think is key to understanding their choices. People are typically reluctant to lose control – or perceived control – over decisions, even if outsourcing the decision (to anexpert or an algorithm) would lead to a better expected outcome.This “control premium” may partly explain why so few say theywould hand their money choices to a robo-adviser.’
ING defined a robo-adviser as ‘a computer program that learns your preferences and invests money for you based on this information’. Of course, not all financial decisions involve investment but it is probably generally true that the job of the robo-adviser is to discover your true preferences in any number of different areas of choice involving money. At the present stage of the robo-advice business, which is almost entirely a route into discretionary portfolio management, the preferences are limited to those required by ‘suitability’ regulation. The online service at the point of signing up merely replicates the offline process for categorising clients by risk appetite, categorising products by volatility and matching up the two.
This limited current offering makes it difficult for people to envisage how interacting with a computer (or even an adviser using a computer) could provide a greater, let alone equivalent, sense of control even if they can see why computers might provide better outcomes. The most successful adopters of technology-driven decision support services will be the ones that have that imagination and can deliver an experience that customers cannot yet imagine for themselves.
Our own experience of providing a quantitative portfolio-management service may be relevant to this question of control versus delegation. Most of our clients came from arrangements that were advisory rather than discretionary, yet all have accepted a discretionary service and independent survey evidence suggests they actually feel in greater control. This is because they believe they have control where it counts and have delegated decisions that either do not count as much – or else they are obviously those that harness the power of algorithms to make better decisions that humans can, such as by being objective instead of emotional.
It is not the role of our advisor or relationship manager that determines where they are willing to draw the line between control and delegation. It is the way we chose to use technology to make decisions. Our innovation was that the same quantitative model used to manage the portfolio over the lifespan of a given financial goal could be used to discover the ‘true’ preferences relating to that goal. Because we were modelling the probable real outcomes of a dynamic portfolio, with specified targets and tolerances at possibly multiple time horizons, we could use those outcomes to inform client choices about resource requirements and risk levels (effectively by pricing them in terms of outcomes) and to help them visualise (again in terms of outcomes) what they would most value and where the constraints (such as worst tolerable outcome) should be placed.
When robo-advice clients get to spend some time planning their own fully-customised plan by interacting with a computer programme, they are likely to see their control over the key explanatory variables as providing the control that counts. If they also have expectations that the progress of the portfolio will trigger options about altering the variables, and that what they choose will again directly reflect their own preferences and constraints, they will expect to remain in control. Indeed, they may not even see this as ‘advice’ because it fits much more closely with the idea of guided or informed self-determination. They feel it is their judgement, even though the way judgement is applied to the facts if a function of an expert’s computer logic.
That is not all that computers can do to convey a sense of control of the agenda. This is about trust. The large number of people in this survey trusting their banks confirms suggests to us that there is too much trust and not enough thinking about the agenda of their agents. But that is just as true of a financial adviser outside a bank. Interaction with a computerised, iterative decision process programmed both to discover individual goal-based utility and calculate how utility can be maximised is a remarkably disarming experience. Computers say thing that agents wouldn’t want to say. Computerised decision making leads where it leads not where an agent wants it to go. That tells clients a lot about whose agenda is driving decision making.
There is one final element of the robo-advice advantage that we think our business demonstrates and that is that the substitution of time-based costs by computerised processes makes it much easier to replace portfolio-based fees by flat or fixed fees. This has many advantages, not least that the true definitions of client utility discovered better by robo-advice often involve spending not investing (family raising, housing equity, gifting to children and grandchildren), saving in a different form from a portfolio or retaining rather than replacing existing forms of capital (a final-salary pension for instance). These are all actions that potentially reduce the asset base on which industry fees are typically set. Even if clients do not realise what a difference that makes to the advice they receive or the options they get to hear about, a flat-fee business will itself be sounder for being more predictable and less vulnerable to market volatility.