Will robo-advice replace your financial adviser?
Cost, lack of trust and poor knowledge are the biggest barriers for consumers when it comes to accessing financial advice, according to the Financial Conduct Authority.
Robo-advice is one way banks and investment firms hope to break down these barriers.
What is robo-advice and how does it work?
Robo-advice is an automated way for people to make financial decisions.
The robo-advice process starts off similar to the normal route of speaking to an adviser – you answer fact-find questions, complete a risk questionnaire and answer other suitability questions before receiving a recommendation – but it’s all done online. There’s no face-face contact.
Robo-advice works via a series of algorithms, including psychometric risk profiling, and forecasting shows the risk and rewards associated with a particular decision. A report is then produced for the investor.
Currently, robo-advice works on an individual case basis, so you can say you want to invest an amount of money for your pension or for inheritance tax planning purposes, but you won’t be able to do both together.
It works on a basis-point or fixed-fee model, though it’s difficult to give an exact idea of costs as they vary depending on the amount you want to invest, the provider and the length of the investment. But prices can be as low as £150 for an initial report.
Who is robo-advice aimed at?
Robo-advice services are aimed at people with smaller investment pots because they are more cost-effective than going to a financial adviser for full advice.
Advice firm QS Financial Planning Solutions offers a robo-advice service for clients who have modest investment levels and monthly savings.
Graham Bowser, a financial planner at the company, says: “We will engage with users on an ongoing basis to provide financial education bulletins and no doubt over time some will reach the stage where they require a more comprehensive advice service and so will ‘trade-up’ to a full advice service.”
However, there’s anecdotal evidence to suggest even those with larger investment pots are choosing to go online to seek robo-advice.
Andrew Storey of eValue, a firm which provides tools to power robo-advice services, such as Aegon’s Retiready, says: “We have seen a much higher degree of interest from companies dealing with high net worth individuals than you would expect for something aimed at lowering costs for small investments.”
What are the benefits of robo-advice?
The overarching benefit is price. Robo-advice essentially removes the middle-man so should be much more cost effective. It opens up financial advice to more people.
The other major boon is that as it’s all done online. Investors have much more control so if they want to sort something out on a Sunday evening, they can. They won’t need to arrange meetings to generate reports.
Is robo-advice regulated?
Robo-advice is regulated by the Financial Conduct Authority (FCA) in the same way as advice given by an adviser.
Storey says: “Whether it’s a human or algorithm the same level of care needs to be applied. This is part of the issue for robo-advice in that the algorithms need to be pretty good to stand up to scrutiny.”
He adds that “highly qualified humans” will oversee and check cases (not all) and the process to ensure it remains “compliant and suitable”.
The same complaint procedures apply as with face-to-face advice. If a customer has been recommended a product that turns out to be inappropriate, they can take their complaint to the Financial Ombudsman Service.
What are the risks of robo-advice?
With the recent hacking headlines, one key concern around how robo-advice is security and how data is stored and protected.
According to Storey, robo-advice security is on the same level as bank security. The systems use encryption, firewalls and a series of other requirements to satisfy security measures.
The other concern centres around the algorithms and technology – if errors were found in the technology which powers the robo-advice platform, it’s likely that it would be widespread, affecting all clients with the potential for ‘mis-advice’.
Another question considered by the industry is what happens if a customer receives and pays for a report and then buys products elsewhere – where can they complain and who will take responsibility?
Further, what happens if the robo-advice tells a customer not to do something and they go against this advice? The concept is still developing in the UK so the rules are not always clear.
But arguably the biggest downside is robo-advice only takes into consideration a small part of your overall finances, it’s not all encompassing.
Robo advisers are “unlikely to point out anything else that should be looked at,” says Storey.
Will robo-advice services replace advisers?
Storey is absolutely adamant that robo-advice will not make financial advisers redundant. He says there are three reasons for this:
- It provides access to a market which currently isn’t served by advisers, therefore it’s bridging a gap.
- Advisers can use this technology to become more effective and more profitable. “This means that a large number of smaller clients they don’t want to talk to because they won’t pay enough can be kept happy and on the books, so when customers need the true holistic advice, the advisers are first on the call list”.
- There are limitations to what algorithmic advice can do. “If you want anything beyond a focussed solution you’ll need a qualified, experienced financial adviser. And that will always be the case.”
How do you get started with robo-advice?
Nutmeg – the online investment management service – is often quoted as robo-advice but Storey says while it’s very close as it offers guidance to help you choose your investments, it’s not quite the same as robo-advice recommends a specific fund that should be suitable.
He lists the following as robo-advice platforms: