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Digital advice: what is it and how does it work?

Updated 30 March 2022

4min read

Kate Morgan
Staff Writer

Traditional financial advisers can be very expensive, so it’s unsurprising that not everyone is interested – or can afford – in seeking one out. 

However, that doesn’t change the fact that many of us would still like to receive financial help in some capacity – that’s where digital advice comes in.

Although digital advice is still quite new, more and more services are becoming available. The benefits are: you can ask lots of questions online; it’s relatively cheap; you won’t be made to feel unintelligent by a computer – and you can do all of this in your PJs if you so wish.  

Let’s take a closer look at what digital advice actually entails. 

What is digital advice? 

Technology has changed many aspects of our lives: how we eat, how we travel, and even how we manage our health – so it was only a matter of time until technology started to change the way consumers get financial advice

Digital advice has made financial expertise and knowledge more accessible to everyone, which is a blessing for many, as the industry was once reserved for individuals with high-flying bank accounts, leaving those with less than £75,000 in savings having to muddle through complicated formulas and figure out their financial standing on their own.  

Making finance more accessible is the key factor here. 

How does digital advice work? 

Digital advice has been welcomed by many as it embraces modern tech to do a lot of the heavy lifting and fact-finding people need to improve their finances. 

Digital advice also removes human bias from the equation. Robo-advisers use algorithms to understand and predict investor preferences, risks, and goals.

The process usually starts by those seeking out financial advice being asked a set of demographic and psychographic questions that leads to a model portfolio. 

Your profile questionnaire will usually include questions on: 

  • Gender 

  • Income 

  • Liabilities 

  • Willingness to take on risk 

  • Current asset allocation 

Simplistic robo-advisers will use this info to create your investor profile, whereas comprehensive robo-advisers look for more in-depth information through AI and data, using financial transactions like investment, banking and credit card transactions to understand the investor’s actual financial behaviour. 

The advanced tools help comprehensive robo-advisers judge your financial behaviour and how likely you are to behave in a particular situation. 

Comprehensive robo-advisers are therefore able to establish a clear picture of how you actually use your money, rather than relying on what you say you do with your money.

This can reveal information you may not have known about your finances, such as a pattern of cautious decision-making, overlooked liabilities, or higher spending than your estimate. 

Now, of course, there are lots of different types of digital advice on offer: from processes that are almost entirely online, to hybrid options which blend the digital and human touch. 

How much does digital advice it cost? 

The cost of digital advice will draw many people in. Younger investors tend to favour digital advice for a lower cost, and a lot of older investors are said to be interested in digital advice if it saves them money. 

The cost of your digital advice will depend on scope, function, and level of advice required – but you should expect a regulated, personalised advice service to charge you less than 1% per year for its  admin, advice, and investment services all in one transaction.  

To put things into perspective for you, the most sought-after wealth managers usually charge about 2.2-2.5% per year. 

Who is digital advice best/suited for? 

Similar to many other areas of advice or expertise, digital advice won’t be the right fit for everyone.

If you need bespoke treatment for your finance; want an ongoing relationship with the same person; or need to discuss intricate details like inheritance tax, trusts, estate planning, and tax advice, digital advice probably won’t be the best route for you to take. 

However, if you want to outsource decision-making; like the convenience of a digital service; or want advice to plan for a decent retirement at low-cost, you will likely benefit from digital advice and will reap rewards in the process. 

Millennials and those with more modest portfolios who need asset allocation advice or basic financial planning help will certainly be able to contact many online advisers today to help. 

Types of digital advice 

Digitally supported (personal) investment advice 

Digitally supported investment advice is one of the first steps to consider when deciding on whether digital advice will work for you and your financial needs. 

This has already been implemented successfully by a number of banks and financial institutions.

The goal of this particular advice model is the digital support of financial advice by software solutions designed specifically for the sector. 

These software solutions, which are either in-house developments of the bank or licensed applications that have been adapted to their needs, support the adviser with: 

  • Client profiling 

  • Analysis of portfolios 

  • Simulation of investment proposals including pre-trade testing and documentation 

  • Implementation of periodical portfolio reviews including documentation 

  • Portfolio monitoring (post trade testing). 

Hybrid advice 

This semi-automated financial planning and investing solution offers personalised advice through human interaction and support, combined with digital methods, enabling you to receive the right recommendations for you to achieve your financial goals. 

Hybrid advice recommendations are usually run by a centralised investment proposition (CIP) strategy and implemented with multiple strategies (DFMs, model portfolios, multi-asset funds) based on risk and client goals. 

Through the hybrid model, advisers have the flexibility to deviate/move away from CIP strategies, depending on a client’s specific circumstances, to offer a bespoke client portfolio on a discretionary basis when needed. 

Robo-advisor 

Digital platforms known as ‘robo-advisers’ provide automated, algorithm-driven financial planning services with little to no human supervision. 

Robo-advisers usually ask questions about your financial situation and future goals through an online survey; they then use the data to offer advice and automatically invest for you. 

The best robo-advisers offer prospective investors with easy account setup, robust goal planning, account services, and portfolio management.

But not only that, robo-advisers will offer investors security features, comprehensive education, attentive customer service, and low fees. 

Glossary of terms 

  • Digital advice: Digital investment advice refers to investment advice that is delivered by a computer rather than a human adviser.

  • DFMs: Data Flow Media Systems. 

  • Model portfolio: A model portfolio provides individuals/investors with a combination of managed investments which are professionally researched, and which blend various investment managers, investment styles, and asset classes to achieve diversification in your portfolio. 

  • Multi-asset funds: This is a combination of asset classes (cash, equity, or bonds) used as an investment. If you undertake a multi-asset class investment then it will contain more than one asset class, creating a group or portfolio of assets. 

About the author
Kate has written for leading publications and blue chip companies over the last 20 years.