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How COVID-19 Boosts Case For Hybrid Advice Models

Daniele Bernardi, 7 September 2020

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The author of this article examines how the pandemic's encouragement of digital technology adds weight to the idea that wealth advice will embrace new channels. However, the crisis has not displaced the need for face-to-face interactions, and has made people more aware of its value.

The global pandemic affects wealth management in numerous ways and some of the impact may not be fully apparent for months. In the short term, it’s clear that COVID-19 has massively disrupted working life, accelerated the use of digital channels such as two-way video, forced managers to delegate in new ways, and encouraged wealth advisors to use digital social networks in their hunt for clients. All these changes bring risks and opportunities – they can cut costs and improve a work-life balance, on one side, but also create loneliness and worry among younger workers and encourage cyber-crime, on the other. Other changes, such as in real estate use, transport, marketing and recruitment, may take longer to show up. 

It is, of course, worth reflecting that some of the changes were in the works anyway – COVID-19 has accelerated, but not caused, these transformations. 

With such considerations in mind, here are thoughts from Daniele Bernardi, chief executive of DIAMAN Partners, a fintech management company that was founded in the US about two decades ago. 

The editors of this news service are pleased to share these views; the usual editorial disclaimers apply. Join the debate! Email tom.burroughes@wealthbriefing.com and jackie.bennion@clearviewpublishing.com

For the wealth management industry, the pandemic and subsequent volatility has shifted investor perceptions towards investment advice, with many now placing more importance on retaining a human-touch within advisory services.

COVID-19 sent the global markets into free fall as countries halted day-to-day activity, to halt the virus. Investors panicked -  even those with the right advice lost money and those with less advice lost much more. According to DIAMAN’s survey of more than 1,000 investors in the UK, recent market uncertainty has left investors on automated advice platforms feeling unsupported. In fact, over half (54 per cent) of respondents aged 18-25 said that, since the beginning of COVID-19 induced market volatility, they have lost trust in using robo advisors, with many (67 per cent) investors now calling for a digital experience that also enables interaction with a human advisor, without the fees typically associated with bespoke services.  

When asked about human versus digital interaction for financial advice, the most popular response was a hybrid model (40 per cent), followed by a human financial advisor with no digital involvement (34 per cent). And whilst 17 per cent of investors did not have an opinion on this, just 9 per cent want a robo advisor with no human involvement.
 
It might feel like the pandemic is the sole reason behind this shift in sentiment, but in reality, the industry has been heading towards this change for some time. This growing desire for a hybrid approach to investment advice may have been catalysed by COVID-19, but it can also be attributed to the rise, and fall of, robo-advice. Over the last decade, digital wealth managers have introduced a dose of long-needed disruption to the investment industry. Robo advisers stepped in to offer a new journey for inexperienced investors, digital enthusiasts, and seasoned investors with too small a pocket to justify the cost of going to an advisor. Just a few years ago, industry analysts gazed into their crystal balls and predicted that investors would pour their money into robo-advisors (in 2016, KPMG projected that AuM would be $2.2 trillion by now). 

So why, in 2020, are we still waiting for the robo revolution?

Whilst robo-advice has come a long way over the last decade, it is far from entering the mainstream. Despite encouragement from the UK’s Financial Conduct Authority and a strong belief that the digital natives would flock, the cost of aquiring new customers for robo advisors was simply too high and profit margins too low.

And although many expected automated services to bridge the advice gap and get people saving and investing at a reasonable cost – the outcome was quite different. In reality, although digital tools have been used to drive down costs for investors, it has been at the cost of less human interaction, which in return has negatively impacted investor returns and risk exposure. 

This begs the question: is coronavirus in fact the catalyst that the wealth management industry needed? Amongst many things, the pandemic has taught us that investors need access to an expert they can trust and to lean on to avoid behavioural investing mistakes - but without the price tag. Calls from the industry for a hybrid solution that combines expert advice with technology, to offer a personalised one-stop shop, have now been answered. Accelerated by COVID-19 induced market volatility, an economic, digital solution that retains human advice is likely to become the new normal for investors and advisors alike.

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