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Editorial - August 2016

Paul StanfieldPaul Stanfield
Chief Executive at FEIFA / FECIF Secretary General

Robo-advice financially unviable

The above was the main content of an article in a financial industry publication last month. This was based on a recent study, which found that UK robo-advisers are structured in such a way that they will lose money and “most will go bust before acquiring the sizeable assets under management needed to survive”.

Food for thought, not least for regulators – many of whom seem to think that so-called “robo-advice” is the silver bullet to solve all of the main issues of providing and delivering advice, and – most specifically – filling the advice gap. There will no doubt be arguments either way as to the financial validity of automated services, but this research should at least raise questions that all market stakeholders want to see answered.

The report, produced by SCM and entitled Fintech Folly, confirmed that fees for automated advice on a £25,000 portfolio ranged from around 0.3% to 0.94% per annum, with an average cost of 0.59%. It would appear that this is insufficient, in most cases, to even come close to generating profit. As a result “one well known UK robo-advisory firm has reported spending a little over £9 for £1 of revenue”. The average client would apparently have to be invested for nearly 11 years for the firm to break even – despite research indicating that the current average period is only 3 years.

The report concluded that, on average, it presently costs such companies “£180 to make £17.50 net each year”.

I have written before about my concerns re automated advice in financial services but I have also stated that I am very much in favour of increased automation within the delivery of advice, and it is sensible for me to stress that again now. I am not a dinosaur - far from it I hope! – I just think that we need to be sensible, rational and clear-thinking in how and where such additional “computerisation” of the processes should really occur: we need to objectively assess where value can be provided for all stakeholders and, most importantly, particularly for consumers.

After researching 10 different “robo firms”, SCM was also somewhat scathing about the services provided, citing misleading performance calculations, questionable statements regarding fees, and over-reliance on risk questionnaires, amongst other issues. Now, it is of course true that the services provided by human advisers vary in their accuracy, professionalism and transparency – that is not something that is limited to an automated service – but it does stress the need for such online services to be subject to exactly the same regulatory frameworks and requirements as flesh and blood advisers, if advice is being provided.

What really caught my eye, however, was what SCM described as the biggest flaw with robo-advice, namely the misconception that it offers the same range of advice as face-to-face advisers. The report noted that this: "is not the case in most robo-advice models” as they are “simply offering direct-to-consumer investment solutions”. In other words, not really advice at all…..

This brings me on quite nicely to another article that I read quite recently, entitled “The key value of advice in a fast changing world” and written by John Astrup at Zurich International. I don’t know John, but his thoughts made a great deal of sense to me.

John reconfirmed (to me at least) that the average return of the “do-it-yourself (DIY)” investor is dramatically lower than the return on the average mutual fund. He concluded that one of the main reasons for this is that “investor behaviour becomes dislocated from their own personal goals – we see investor emotions driving decision making”.

He quotes a survey from Aon Hewitt; this shows that over a 10-year period individuals who took a DIY approach to investing were “1.86% worse off each year than those who used a financial professional”. Apparently they found that “during the most volatile five years of this time period for equity markets….the effect jumped to 3%”.

He also refers to a Vanguard study into the value of investment advice that puts this at 3% annually on average and actively assigns a value to all the services an adviser provides, from wealth planning, asset allocation and most importantly to managing customer behaviour.

The crux of the message is that advisers help clients to successfully manage their own (often potentially negative) behaviours. He states a belief that “hand-holding” and managing customer behaviours amounts to 50% of the value that an adviser adds and points out that the increased returns amount to a great deal over the sort of timescales that many people need and receive good advice (e.g. pension planning).

My link between the financial viability of automated advice and the area where a financial adviser probably adds the most value is quite simple; a robot can’t do that! If the key area where advice adds value to the client is something that cannot be provided by an online service, not even one that proves to be profitable, then why would we put all our eggs in the “online advice basket”?

My belief is that we should predominantly use automation, and technology in general, to make human advice more efficient and cost-effective, and therefore more widely available to the masses. In my opinion that is the best way to fill the advice gap, or certainly a very good strategy. It can be achieved whilst still protecting consumers and making sure that they receive true advice, not guidance wrapped up as advice from a company that may have no viable financial future.

It is just my opinion of course…

References/sources:
“UK robo-advice financially unviable, warns investment firm SCM” >>
http://www.international-adviser.com/news/1030296/uk-robo-advice-financially-unviable-breaking-fca-rules
The key value of advice in a fast changing world” >> http://www.international-adviser.com/analysis/1030689/value-advice

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