Robo advice has the potential to be the agent of change for the UK’s financial advice model and help transform the distribution of investment products to individual retail consumers.
A clearer definition of what exactly robo advice encompasses is undoubtedly needed.
At present, the robo advice market in the UK is relatively small but the experience of automated systems in the US clearly shows the huge potential for growth in this sector.
Following the financial crisis in 2008, a number of small, pioneering technological start-up companies began to emerge in the US championing a new way of delivering on-demand, simpler and cheaper financial advice to consumers. The concept of robo advice was born.
Robo advice has now reached our shores.
Seen by some as the end of traditional face to face advice, more sanguine advocates believe that robo advice presents a huge opportunity for the financial services industry, enabling consumers to obtain professional advice at a much lower cost than undertaking a full advice process. In fact, following the recommendations put forward in the Financial Advice Market Review (FAMR), the FCA is making major efforts to encourage the development of robo advice to help create a more inclusive, accessible, engaging and cost-effective advice market in the UK.
Defining Robo Advice
Robo advice is a popular and colourful description imported from the US which, in a UK context, is applied to a wide variety of offerings which have little or nothing to do with robots and, in some cases, have nothing at all to do with offering advice.
Of course, it is important to remember that in UK regulatory parlance the word “advice” specifically means providing an individual with a personal investment recommendation. In fact, a number of high-profile UK pioneering firms are often described as robo advisers when no advice is actually given. Their approach is often to provide users with guidance and then offer them a choice of risk rated portfolios from which to pick.
A clearer definition of what exactly robo advice encompasses is undoubtedly needed. Not only will this enable financial services providers to better understand how to incorporate automated financial planning services into their existing advice offerings but, crucially, will give greater clarity to consumers about the underlying basis and limitations of the robo advice processes they are interacting with.
The nature of robo advice in the UK
The purest form of robo advice uses computer algorithms to present advice which is focused on a specific goal or financial need. An investment recommendation is produced by computer algorithms and must be able to demonstrate suitability for the consumer. For example, there must be no other financial priorities which should take precedence, like paying off credit card debt.
The FCA is very clear that, for robo advice solutions, there is to be no relaxation whatsoever of the regulatory threshold as far as suitability is concerned.
As a result, most of the “pure” robo advice solutions that have emerged so far in the UK have adopted regulatory outsourcing or “buck passing”. With this approach the supplier of the robo advice software does not actually give the advice. The regulatory risk is taken by the firm using the software with its clients – usually IFA firms who are typically entrepreneurial by nature and more inclined to take the regulatory risk than large financial institutions.
Alongside the firms adopting this approach, there is also an emerging segment essentially offering web supported advice. In this case, the consumer follows an online advice process but, ultimately, the investment recommendation is made by a human adviser (often known as “hybrid” advice). Due to the human involvement, hybrid advice is more expensive to deliver. Nevertheless, this is likely to be a popular approach for cautious financial institutions, since, essentially, every computer generated recommendation is reviewed. Over time, through the use of management information (MI), the digital process can be made smarter, the use of human advisers can be scaled back and the advice will become increasingly “Robo” and cheaper to deliver.
Many major UK banks have recently shown considerable (if cautious) interest in offering robo advice. Historically, most of the UK’s large banks stopped providing investment advice to consumers following the introduction of the Retail Distribution Review in 2013, when it became uneconomical for them to advise customers with relatively small amounts of money to invest. However, if the US is anything to go by, it is the “big brands”, such as well-known, established banks, that will ultimately be successful in this brave new world of automated investment advice.
At present, the robo advice market in the UK is relatively small but the experience of automated systems in the US clearly shows the huge potential that exists for growth in this sector.
Ultimately, whether pure or hybrid or self-directed with guidance to the consumer, robo advice has the potential to be the agent of change for the UK’s financial advice model and help transform the distribution of investment products to individual retail consumers.”
More on Robo Advice as the catalyst for transformational change
EValue recently released our latest White Paper, ‘Robo Advice – The catalyst for transformational change’. This paper looks at market developments to date, lessons that can be learned from the US, the potential impact that Robo could have on distribution in the UK and reviews some consumer research on different robo propositions currently available in the UK.