While everyone understands the value and reassurance that advice from a human adviser can provide, the drive to Robo advice results from the need to reduce the cost of advice and, thereby, help to close the “advice gap” created by the implementation of the Retail Distribution Review.
You say Robo, I say Cyborg, let’s call the whole thing off!
The name Robo is an unfortunate import from the US where online advice (mostly a portfolio management service) started to appear on the scene about 7 years ago – just after the financial crisis of 2008. It is a name, like so many in our industry that was chosen without any consideration of whether it would appeal to consumers. Given the potential association with Robocop, a Robo advice session could seem like a frightening experience – certainly not one for the faint hearted! The Robocop association is also unfortunate because Robocop was actually a cyborg. His brain and digestive system were human. While genuine Robo advice is available in the US, most of what is termed Robo advice in the UK is actually Cyborg advice i.e. it is advice from humans supported by an online advice process.
At this point readers who are not science fiction devotees may be questioning whether this semantic distinction matters. Indeed you could be forgiven for thinking that dealing with a Cyborg adviser would be preferable. At least there is some element of human interaction. However it comes at a cost which is quite considerable and therefore, to a significant extent, undermines the aim of delivering affordable advice to the mass market.
Removing the human element
The difference between the Robo approach taken in the US and the UK’s current preference for Cyborg is largely explained by our greater concern with giving regulated advice. Although the regulatory requirements in the US appear similar, in practice, there appears to be much less concern over compliance and regulatory comeback. Whether this confidence proves to be well founded, remains to be seen. The advantage of this relaxed approach is that the process can be short and streamlined with few questions asked. The risk of turning consumers off is therefore minimised.
In the UK, regulatory risk is top of mind. The FCA has been very clear that, although Simplified Advice can focus on one financial need, the same suitability standard applies as for full advice. This means that it is important to make sure that there are no other priorities which would make a focus on one financial need inappropriate. For example advice to buy an ISA, when a consumer has expensive short term debt, would not be judged to be suitable.
So we are stuck with having to ask lots of questions and the task of analysing all the answers to make sure recommendations meet the FCA’s suitability requirements. Unlike the US, Robo advice in the UK will need to have a much greater focus on behavioural finance techniques and gamification to help get consumers through a longer advice process. Over time as confidence builds, the responses to questions will be analysed by computer algorithms replacing human advisers. Compliance monitoring will be done centrally using management information generated from the system. Adviser training will no longer be required as human advisers are phased out. The cost of advice will plummet as the “brain and digestive system” are replaced by the machine. Genuine Robo advice will have arrived!