July 6, 2017

Robo-advice: does it do what it says on the tin?

Jonny is a consultant and content writer in the fintech sector. he left the FT in 2016 where he covered financial services.

Smart Platform blog
One thing that has made the post-financial crisis world different to all others is the profound technological changes and great leap in innovation with new digital entrants to the sector.

This has democratised the financial services world, with providers clamouring to serve the needs of today’s more demanding and savvy consumers, improving outcomes for investors and savers of all ilks.

The Financial Advice Market Review, launched in 2015 by the FCA and Treasury, effectively placed the consumer at the centre of this new world of openness and transparency. Recognising the rising expectations and responsibility for saving for one’s future shifting to the individual, the review set out the parameters for a no-nonsense and fair approach to financial products and services. FAMR recognised the need to make saving and investing work for all, and to be engaging and affordable, while considering people’s needs for different types of help with financial decision making, robo-advice has answered this call and provided a valuable proposition.

A really pertinent recommendation highlighted in the final report, published in 2016, was the call for the FCA to help firms with automated advice models come to market more quickly and to examine new and emerging technologies that can offer cost-effective, user-friendly and efficient advice services. The report also looked at the issues that consumers face accessing advice calling on the Treasury to look at amending the definition of regulated advice. That definition was set out in the findings of the Retail Distribution Review (RDR), which was the catalyst behind cleaning up the advice space by raising the minimum level of adviser qualifications, and by making fees clearer and more transparent in the retail investment space. 

Another problem with financial advice up until recently has been that good advice is hard to provide cost effectively to anyone other than the more affluent. The economics of employing financially savvy individuals does not work unless the adviser can take a cut on portfolios worth millions. This is why robo or automated advice helps – it is considerably more efficient and scalable for mass market applications, not to mention that the advice itself can be free of human biases.

The retail investment market has since seen a proliferation of digital solutions with robo solutions neatly slotting in to this space and plugging the ‘advice gap’ making advice more accessible, and a frictionless and less daunting journey. Powered by data and algorithms, fintech start-ups and some banks have taken big strides in this space, leading to some advisers fearing they could be superseded by technology.

However it is important to differentiate between online wealth managers, which are labelled robo-advisers but essentially provide online asset allocations which identify an investor’s risk profile and a portfolio is created and monitored. According to Accenture, the capabilities are fairly basic: “They use simple surveys to profile clients and to assess their needs. An asset allocation is proposed, adjusted and implemented. Portfolios are monitored, rebalanced and reported on.”

In contrast, some robo-advice solutions provide fully regulated, independent and holistic financial advice solutions. Removing some of the human element certainly streamlines the advice process, reduces costs, lowers minimum investment amounts, and will suit people with both complex and less complex needs.

While the robo offerings question the coining of the phrase and see themselves more as online or digital wealth managers, some do not claim to be a substitute for regulated advice. Should the automation, that sits at the core of robo per se, be deemed as advice? It is advice in that it provides a suggested course of action but in many cases, it does not provide regulated advice that will encompass a person’s lifecycle.

There are other models that blend automation with human interactions and these are gaining traction. Propositions that augment robo automation with a human advice element could be a step up, and help plug the gap. A highly attractive feature according to a KPMG survey that looked at the features that matter most to robo users in the US, was the ability to consult an adviser about their investment approach and other financial matters, “This suggests that digital advice services are not a “one-size fits all” model; there are opportunities to develop hybrid models.”

However it still falls short of fully regulated financial advice, with the consumer redress that comes with it. Wealth Wizards utilises the efficiencies of technology but provides with it a fully regulated advised journey, supported by human advisers and using a wider fact find and data spread.

While the FCA fully supports the role that technology can play in creating a more inclusive, engaging and cost-effective financial advice space in the UK, the regulator has not lowered the suitability standard of the advice given. Some robo advice solutions support this as they can not only suggest a course of action focused on a particular goal, but can also factor in other financial circumstances, factors and priorities to ensure the advice given at the end of the automation process is suitable.

One of these, a white label solution from Wealth Wizards, powers the software that provides regulated financial advice in the house view of the client. This enables the provider to scale up their advice services, increasing efficiency and reducing costs. It also provides full consumer protection; a regulated adviser is liable for all advice given.

So while technology is the force behind the transformation of the financial services sector, we must ensure that those solutions are genuinely tailored to people’s needs and look closer at the robo solutions, and see if they are they actually providing advice, that fully understands the customer with a personalised and focused solution that holistically encompasses their entire lifecycle.

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