Adrian Boulding: Why IFAs should embrace robo-advice

Robo-advice has a long way to go to satisfy regulators' disclosure and suitability requirements, but advisers should view these fledgling services as an opportunity not a threat, argues Adrian Boulding

On May 21 the Financial Conduct Authority (FCA) reported on its findings from a review of seven automated online discretionary investment managers (ODIMs) and automated advice services providers – both known more loosely as robo-advisers.

The results look worrying for robo-advice services already up and running and others set to launch in the coming months. There is clearly much more work to do in the areas of customer fact find, charges disclosure, as well as suitability of advice and investment selections for customers.

The FCA’s main concerns centred around not properly assessing clients’ knowledge, investment experience, investment objectives, current financial situation and capacity for loss.

There is clearly much more work to do to ensure enough detail is gathered, as efficiently as possible, to ensure that service users are directed towards the right types of investments which match their objectives, risk profile and financial status.

Finding that sweet spot on the risk-return curve can be just as difficult for a robot as for a professional adviser.

Sixth sense

It’s clear that more needs to be done at fact find stage to gather financial situation, marital status, overall family situation – number of dependents etc, employment status and types of income they are depending on.

The principle of goal-based investing is a sensible one, but it also needs to be tempered with the realism of gathering the personal financial facts to discover what is truly affordable. This demands a few more minutes of the client’s precious time, but financial decisions can impact the rest of their life so the time investment is important.

Anomalies and mismatches between knowledge/investment experience, declared risk profile and selected investments need to be spotted by online fact find tools and flagged up early to avoid mistakes which create the potential for customer detriment. Questions used to gather key detail about the customer’s circumstances need to probe real financial knowledge, not simply ask investors how comfortable they feel about x or y investment class.

That sixth sense that a professional adviser develops with experience that says the investment the client is asking for is not right for them, has to be replaced in robo-land with additional questions that cross-check the earlier analysis.

There is also a tendency for customer journeys to be broken and audit trails to not be fully recorded.


The regulator was most worried when it found evidence that a regulated adviser did intervene at a certain stage in an automated advice service, but the service provider then failed to record exactly what advice was given.

Surely, we all know by now that giving advice, while failing to keep records, means that any future compliant will be upheld against the adviser.

Right now, the link between advice and the transaction itself can be lost mid-stream, creating the potential for customers to end up with unsuitable investments, potentially demanding savings levels which are unaffordable. At times it proved unclear whether decisions were advised or execution-only.

They also spotted the danger that investors might ‘game the system’, effectively giving untrue answers in terms of knowledge or risk appetitive, in order to gain access to a specific investment (which is more likely to prove inappropriate longer term as a result).

Further, there is an acknowledgement by the FCA that it will need to ensure that these services comply with highly-prescriptive suitability requirements laid out in European Securities & Markets Authority (ESMA) guidelines as part of MiFID.

ESMA also demands proportionality be applied to suitability so that if services are providing “access to complex or risky financial instruments, investment firms should carefully consider whether they need to collect more in-depth information about the client than they would collect when less complex or risky investments are at stake”.

The body also suggests that investors in risky assets should be re-assessed more regularly to make sure that investments are still performing in line with objectives, expectations and affordability criteria.

The guidelines also suggest that more in-depth information should be gathered for older and potentially more vulnerable investors who may be less able to dig themselves out of a hole if they are put in one by an investment firm’s selections.

Working with the regulator

It is sad to say that most of the ODIM and auto-advice providers that were reviewed, were not given a clean bill of health. Most will now be working closely with the regulator to improve systems, tools, customer journeys and reporting in general so that they come closer to the spirit (and finally the letter) of ESMA and the FCA’s disclosure and suitability requirements.

Despite the review which must make worrying reading for new entrant robo-advice firms, it’s clear that the FCA does not want robo-advisers to be run out of town. Quite the reverse, as it states in the review’s preamble: “We want financial innovation in our markets to thrive where it delivers good outcomes for customers in terms of value, costs and choice.”

The regulator is all too aware that tighter regulation of advisers via the Retail Distribution Review also naturally reduced the number of people able to afford regulated advice from an IFA.

For the majority, some sort of robo-advice or guidance-based services is a more reassuring option than going it totally alone using execution-only services. It’s also more likely to lead to better outcomes.

Guidance has proved hard to offer because of the severe restrictions placed on it, which leave us with robo-advice offerings as our only hope to close the yawning advice gap.

So, assuming robo-advice is here to stay and that the disclosure, suitability and reporting requirements will be addressed by stages, and now that new entrants are getting much clearer guidance on best practice and regulatory expectations; what else should robo-advice operations be looking to do to help build strong customer-bases generating enough profit to make these businesses sustainable longer-term?

One of the main things they need to consider in their customer journeys is trust building. In the face to face world, trust is built through story-telling and rapport building.

But in the digital world, this is not quite so easy to achieve. It requires evidence, and lots of it, that you’ve done a good job investing the money of people in similar positions as the new customer that has just logged on.

Lots of testimonials are required, positive peer reviews and third-party recommendations must be abundant and clearly visible. Videos, written content and planning tools, which enable the customer to think and read their way into an area of investment, also help.

There needs to be an opportunity to use live chat to get reassurance at any point in the engagement process. To some extent that is why I believe that wealth management businesses with investment managers on tap are the best place to add a robo advice offering to help attract the next generation of investors.

Young people in their mid-20s to mid-30s may not be able to meet your costs and charges for regulated advice today. However, they would be happy to start investing in a stocks and shares ISA with a few hundred pounds today via your robo-service. And then in a few years, once they are on a stronger financial footing and have financial objectives which demand advice, they are more than likely to come to you for full advice if they’ve had some positive experience investing via your online service.

Dunstan Thomas’ extensive nationwide study of more than 1,000 millennials’ savings and investment habits which we carried out working with Opinium last year, uncovered some interesting findings which bear out this thinking.

We discovered a large number of people in their 20s who were selecting financial providers based on the functionality and quality of the mobile apps that they were offering. We filmed one young man who admitted he only stayed with Yorkshire Bank because of the quality of its mobile app called ‘B’ (instant savings) which helped him save for holidays and rainy days, juggling financial priorities via his phone.

We found another young warehouse-man who was micro-investing in commodities via his mobile phone and app called Money Box. The watchword for many was digital ease-of-use, combined with a need to understand what their savings priorities are – helping them to set aside what were, in some cases, several hundred pounds per month to meet saving investment objectives.


The next generation of savers are clearly becoming loyal to (and enthusiastic about) financial providers, platforms and advisory firms that are able to create seamless online customer journeys which combine great customer experience with meeting regulatory expectations. They must acquire information about a customer’s status in an unobtrusive way to help firms prove the suitability of the investments they select, based on a good knowledge of their customers.

In this way, it becomes possible to see technology as a way of streamlining the two-way flow of information which builds trust whilst simultaneously ensuring that investments are not out of step with a customer’s risk profile, investment objectives, financial status and life stage.

It’s a virtuous circle where, if engagement and loyalty can be built through robo-advice service offerings, it becomes easier to stay up-to-date with their customers’ financial status – thus meeting regulatory suitability requirements.

It also makes it possible for IFAs and wealth management firms to step in when the time is right to offer paid-for regulated advice; once that vital engagement, loyalty and trust has been built and ideally aided by several years of successful, if small-scale, saving and investing.

Having a good robo-proposition is a long-term investment that can capture early the next generation of clients for a wealth management firm.

Adrian Boulding is director of retirement strategy at Dunstan Thomas