The government’s consultation into giving consumers better access to financial advice will consider what role technology, and in particular robo-advice, could play.

Robo-advice is an automated, algorithm-based wealth management service, delivered online without any human interaction.

The buzz around it has brought some much needed interest to an industry deemed opaque by many consumers.

Nutmeg and Money on Toast are two of the biggest providers of robo-advice in the UK, with more market entrants expected this year.

Here, Lee Goggin, co-founder of findaWEALTHMANAGER.com, an online service matching individuals with wealth managers, looks at the pros and cons of robo-advice:

Pros

Lower fees

Fees are almost always lower than traditional wealth managers so robo-advisers will help to fill a significant gap in the market. They cater for the middle-tier or mass affluent investors left behind in the limbo created by the Retail Distribution Review (RDR) and the rising minimum investment thresholds imposed by some traditional advisers.

Access to tools

Robo-advisers give consumers direct access to the portfolio management tools that have previously been available only to the traditional advised market. These tools are the same as those used within the industry, the difference is how the service is distributed.

Not all automated

Few people realise that behind some robo-advisers there are investment teams making decisions on security selection and asset allocation. These are not purely automated and the key differentiator is the lack of face-to-face interaction, thereby bringing down costs.

Cons

Automatic divestment

The removal of human emotion in the investment process can be seen as a positive but there are potential problems when the market changes direction. This could lead to the automated divestment of some quality assets when a more sensible decision would have been to stay invested to ride out the storm.

A robo-adviser will have rules and must stick to them. You can’t alter the sensitivity of an automated model otherwise it defeats the object.

No personal touch

Different questionnaires used by different robo-advisers generate different profiles for the same person. Men typically overstate their risk appetite, something a robo-adviser will overlook but a good wealth professional is far less likely to. This is one of the reasons why face-to-face meetings are so important.

Ultimately, the service levels and overall capabilities are not comparable to wealth managers.

Cookie-cutter approach

Robos provide a cookie-cutter approach rather than a tailored wealth solution. They are great for the retail market but ill-suited to higher net worth individuals who may want access to alternative or bespoke investments and need their investments aligned with inheritance tax planning, insurance, business and other financial affairs.

[article_related_posts]