Initially US advisers saw Robo advice as a threat but more and more are now re-engineering their business models to incorporate Robo advice. By using a “white labelled” Robo, US adviser firms can create an alternative advice option for younger less wealthy customers providing these customers with the opportunity to migrate from Robo to full advice when the need arises. Well executed this strategy can cut customer acquisition costs and improve the efficiency of the advice process.
Of late, some big names such as BlackRock, Charles Schwab, Invesco and Vanguard have entered the market either through acquisition of some of the struggling start-ups or by building their own Robo proposition. For these established brands, a direct to consumer strategy is more likely to be successful. In addition many of them also offer a “white labelled” option for advisers. Virtually all of the US Robos focus on portfolio recommendations for accumulation and avoid the complex areas such as retirement income planning.
No Robo cops in the US
Although, at first sight the US has a similar regulatory environment to the UK, there is a regulatory requirement to “know your customer” and to ensure the suitability of recommendations, without exception, US Robos adopt a very light touch approach. The concern is obviously to avoid turning consumers off by asking them lots of questions. All US Robos ask some questions to assess attitude to investment risk together with capacity for loss but the critical areas which strike right at the heart of suitability are ignored. For example, debt levels are generally completely ignored. How can it be right to recommend an investment portfolio to a consumer with expensive short term debts? Questions about affordability and access to emergency funds are never asked. There are no checks on financial priorities e.g. does the consumer have sufficient protection in place.
It is interesting to speculate on why, in the highly litigious US, Robos have not found themselves in regulatory “hot water”. There could be several explanations.
- Until recently, the rise of the Robos has coincided with quite benign markets recovering from the traumas of 2008, so there have been few complaints from investors.
- Regulation is less proscriptive particularly for the agents of broker-dealers regulated by the Financial Industry Regulatory Authority (FINRA). FINRA is a self-regulatory organisation similar to the model adopted by the UK before the advent of the Financial Services Authority (FSA).
- There is some criticism of FINRA in the US for being “too cosy” a regulator and maybe as a result there some preliminary signs of regulatory review of the Robos by FINRA.
It will be interesting to see whether following the Financial Advice Market Review, the UK adopts a lighter touch. As things stand, it is hard to imagine the US Robos surviving unscathed for 7 years in the UK.
On a positive note, most US Robos address the important issue of managing consumers’ expectations. It is critically important to “go the extra mile” here because there is no human adviser to explain what the potential outcomes from an investment might be – in particular, the possible shortfall in achieving an investment goal. Nearly all US Robos do this by including stochastic forecasts to show the range of future outcomes.
So, to sum up, there is much to learn from the US Robos – both positive and negative.