Robo-advice has frequently been seen as a threat to advisers, or as substandard and gimmicky.
This is wrong and seriously misses the important point that robo-advice is a complement to traditional advice.
Robo-advice not only caters for clients who have traditionally been financially inefficient for advisers to serve, it also allows adviser firms to deal with volumes that are way beyond their existing capacity.
Across the pond
The phase the UK is currently in is similar to that which happened in the US some seven years ago.
When robo-advice started in the US it mostly focused on investing new money without reviewing existing investments.
In the main, robo-advice in the US has been targeted at the younger investor as a low cost pre-packaged investment option, but even if advisers use the technology to reach the masses, it is still far from a threat to advisers on either side of the Atlantic.
The robo-advice process is simple and short. A few simple questions and a risk assessment questionnaire, a stochastic forecast to help investors understand what the outcome might be, and a recommendation of a model portfolio of mostly ETFs to keep the costs down.
It is a process that is not exactly rocket science and can be easily applied in the UK.
Guidance v advice dilemma
Much of the current emphasis on robo-advice is on ISAs and general investment accounts, but this is a sideshow to the main event.
Firstly, it is not very difficult to create an investment robo-advice process which ticks all the regulatory boxes.
Secondly, it is only really necessary because the dividing line between information / guidance and advice is unclear. Essentially, the more help given to the consumer, the more likely it is that the line between guidance and advice may be crossed.
In spite of the FCA’s attempts to clarify the distinction between guidance and advice, it remains a grey area which may ultimately be decided by the courts.
The distinction between online guidance and robo-advice needs legal clarity as the market develops.
Putting Robo advice through its paces
Robo investment advice is undoubtedly useful as a means of resolving an area of regulatory uncertainty and providing a source of income for adviser firms from consumers who it would otherwise be uneconomic to serve.
However, this use of robo-advice is rather like using a Maclaren to pick up groceries at the local store – it completely under utilises the power available.
To understand the real potential of robo-advice, we need to understand what it can do to meet the biggest challenge facing the financial services industry today in the UK – that of pensions freedom.
Every year more than 300,000 people retire with defined contribution (DC) pensions.
Many have comparatively small funds of circa £50,000.
With a typical fee of over £1,200 plus VAT for conventional “at-retirement” advice, the fee aversion of most consumers at present seems very understandable.
Beyond being able to reduce the cost of advice dramatically to around £150, robo-advice has the capability to handle hundreds of thousands of cases a year – a feat which would be impossible by conventional means.
The numbers needing robo-advice will grow rapidly because all those retirees who don’t buy an annuity at outset will potentially need ongoing advice on how to invest and drawdown their retirement savings over the rest of their lives.
This combination of high volume and low cost is the real advantage of robo-advice.
As with almost all innovations, there are some potential downsides, but they can all be managed.
Robo-advice cannot handle complex cases, but it can handle the majority.
In those complex cases, conventional advice can be offered with a substantial discount as a considerable amount of information captured by the robo-advice process can be made available to a human adviser.
The process must be very well-designed and a good model is vital, for any weaknesses in the model will continue to be replicated.
Validation checks and monitoring are essential with borderline cases being identified and reviewed. There is also the risk that consumers may struggle to understand and use robo-advice, but innovative design and gamification techniques can help to engage consumers.
Robo-advice is important because it help address the greatest challenge faced by our industry – helping consumers make wise retirement choices.
Bruce Moss is strategy director at eValue