Since that time the market has become increasingly crowded with both established technology providers and new up-start businesses advertising Robo Advice solutions.
As new names have entered the space, with great interest we have examined each as they have become available. We have been surprised to see how many of these solutions are jumping on the Robo Advice name but not actually offering auto advice or any advice at all. What they are in fact offering is an execution only solution with guidance. They appear to be trying to give as much help as possible without stepping over the line into advice.
What is Robo Advice?
The phrase ‘Robo Advice’ has been adopted from our friends across the pond in the US. In the UK, it covers many different types of proposition including the online delivery of simplified advice (now termed by the FCA, Streamlined Advice).
In 2014 the FCA’s thematic review defined streamlined advice as being “where firms use streamlined and/or automated advice processes to provide customers with a personal recommendation based upon their personal and financial circumstances”. In 2015 the FG15/1: Retail investment advice review further clarified this as “Advice that is limited to one or more of a customer’s specific needs and does not involve analysis of the customer’s circumstances that are not directly relevant to those needs”.
The first definition is a key defining point and this is the basis used to determine if an offering is truly “Robo” Advice. They must provide a personal recommendation based upon the individual’s personal and financial circumstance. The second condition for Robo Advice is that the advice must be automated i.e. driven by computer algorithms. Advice delivered by human advisers supported by an online advice process is also fails the test. It is computer assisted advice sometimes called Cyborg advice.
Many execution only solutions are masquerading as Robo Advice
In their 2015 review, referenced above, the FCA also provided a definition of execution-only, “A service consisting of the execution and / or reception and transmission of client orders relating to particular financial instruments at the client’s initiative. The firm does not give any advice on investments or assess appropriateness”.
By comparing this definition to that of Streamlined Advice, we can clearly determine that an execution only solution would be defined as one that simply allows an individual to browse potential products, and then purchase. It doesn’t offer a personal recommendation and it doesn’t offer any kind of risk suitability assessment. However, and this is where the “grey area” can start, execution only propositions can provide information and guidance but it must not in any way be personal to the individual. If it does then inadvertently it may be judged to be advice. Because advice is considered onerous, most of the “so called” Robo new entrants, steer clear of giving advice. Nevertheless, because there is currently some cachet associated with being called a Robo, few new entrants object to the term.
The most common of these new “Robos” focus on purchasing of ISAs and general investment accounts.
Many of the solutions we have reviewed allow the user to simply define the amount they wish to invest (either a lump-sum or monthly contributions) and then set their own risk profile. They are then presented with a forecast for the potential return on investment, more often than not either a deterministic forecast or a very basic stochastic forecast. If the user is happy with the forecast, they are able to simply purchase their ISA.
If we take this user journey, which is very common among these “robo” solutions, and try and define it based on the definitions outlined by the FCA, it is clear that as no personal recommendation has been made, these solutions should be considered execution only, not Robo Advice.
Why EValue solution is true Robo Advice
EValue began working some time ago on creating our Robo Advice solution. It was and remains our view that consumers want and need advice and when they receive help have a tendency to think they have had advice even when all they have received is guidance. A tension therefore exists between providing as much support as possible to help consumers and wishing to avoid giving advice. EValue’s view is that the safest and most effective way to help consumers is to provide advice and meet the appropriate regulatory standards. We have therefore spent much time defining a series of decision tree and advice algorithms to provide streamlined advice in the areas of investment, protection and retirement.
The standard EValue solutions follows the following key steps:
- About You – The first step is designed to learn about the individual’s personal circumstances.
- Your Money – The second step gathers information on the person’s individual goals and objectives for the future.
- Your Current Situation – This third step is used to understand the user’s financial circumstances.
- Your Attitude to Risk – The final step takes the consumer through our tried-and-tested rigorous risk suitability assessment.
While completing these steps, EValue’s decision tree algorithm is determining the individual’s eligibility to receive Robo Advice, before then feeding all the information gathered into our advice algorithm that then generates a personal recommendation. Thus delivering advice online, this can truly be considered Robo Advice.
EValue is already working with a number of our clients on their Robo Advice offerings. These offerings will follow the above process and use both our decision tree and advice algorithms.
The distinction between Robo Advice and execution only is an important one. As an industry we must act in the best interest of the consumers and ensure they are fully aware of what they are going to receive by using any financial services technology.
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