Chief Executive at FEIFA / FECIF Secretary General
Robo-advice: fact and fiction
I have lost count of the amount of articles about so-called robo-advice. It certainly is the “flavour of the month” and, if we believe all that we hear, will soon become the most important element in the delivery of financial services. I have some strong views on this….
What is it?
There are certainly a great deal of definitions, many of which are either overly-complicated or misleading. Somewhat ironically Wikipedia seems to have summed the situation up quite well: “Robo-advisors are a class of financial adviser that provides portfolio management online with minimal human intervention”. Actually Paul Resnik at Finametrica has also done a rather good job in providing a bullet point list to define the term.
Is it advice?
No. And this is where I have a problem with the term, it is clearly not advice. At the very most, and only in some cases, it is guidance, but even the providers of such services are extremely definitive in confirming that it is not advice. Jason Hollands of UK online investment service Tilney Bestinvest has stated: “Robo-advice has become a bit of a faddish term, and it isn’t how we would choose to describe our ready-made portfolios, as we’re not providing advice but a simple, step-by-step process to help investors select a managed portfolio without the need for an advised process.”
Therefore, during the rest of this article, I will refer to it as automation, for specific reasons that will hopefully become clear.
Is it new?
No. For example, Hargreaves Lansdown created a fully discounted online service for UK clients making their own investment decisions in 1996 and an online share dealing service in 1999, plus a web-based “annuity supermarket” in 2000! It even launched a fully online, non-advised pension product as far back as 12 years ago.
So, I think it is clear that it certainly isn’t new. What is arguably new is the rate of progress and development in this area.
Should we believe the headlines?
No. Well, at least not always. “A comprehensive list of businesses identified as offering 'robo-advice' in the US suggests investor appetite can be vast”, was the way one recent article commenced. The same article then highlighted that the 10 major US companies in this area had total combined AUM of only $6bn. That is hardly “vast”. Even the article pointed out that: “Something approaching $6bn of investor assets might not seem that impressive…..some of our (UK) standalone platforms dwarf that total figure alone”.
I would thus suggest caution when reading or hearing media comment on this subject – and on any subject to be totally honest.
Having said that, increased automation is on its way, of that there is no doubt in my mind – we simply need to take a reasoned view as to the degree and the manner in which it is likely to affect our industry.
Can we learn from the US?
Yes. Interestingly, whilst the US is often quoted as an example of how full automation will “take over”, the US market has actually moved in a different direction. Money Marketing magazine recently summed this up very well: “We commonly use ‘robo’ to mean an advice process with no human intervention, but the models which are exploding in the US do not really fit that mould. They are half-and-half – they have an automated front-end, where the client pretty much self-serves in terms of putting in all their details, and then speaks to an adviser on the phone or via Skype for the advice part”.
It seems clear to me that semi-automation is more likely to be the shape of the future, certainly in the advice sphere.
What do regulators think?
The UK FCA has laid the groundwork for firms to come to market with automated models. Late in 2014 it launched “Project Innovate”, a scheme inviting businesses, both regulated and unregulated, to introduce innovative financial products and services to the market. In addition, the remit of the recently announced Financial Advice Market Review includes a focus on the advice gap and the role that automation might have in this.
The Australian Securities and Investments Commission (ASIC), has confirmed that some existing advice firms and new start-ups were looking to develop new robo-advice models and that it is: “…engaging with the industry on these new developments and how they fit within the regulatory framework. We see the potential of robo-advice to offer a convenient, low cost, trusted advice offering to consumers”.
In addition, the EU regulators have just launched a consultation with regards to automation within financial services.
Regulators have therefore quite clearly seen the relevance and potential importance of automation.
What do consumers want?
This is the crux of the matter and was very well summed up, I feel, in the recent Cerulli Associates report: “Addressing Millennials, the Mass Market, and Robo-Advice”. It stated that: “While some consumers may feel comfortable receiving all of their advice digitally, never interacting with a person, this is a small segment of the overall population. Most consumers want to know that they can reach out to a person to solve a problem with their finances should the need arise."
How should advisers respond or adapt?
The Cerulli report mentioned above went on to say: “"In addition, we anticipate that most, if not all, retail direct firms will have a digital advice offering within the next three years, and traditional advisers will also launch digital offerings for lower-balance investor accounts".
The trade press has highlighted the fact that tools which allow firms to automate certain parts of the advice process are being tipped to take off in the UK (and, no doubt elsewhere as well). Much attention has been focused on the launch of algorithm-based investment portfolios, but other models are being developed which could help advisers to reduce their costs while retaining the human touch.
The online system Advicefront, for example, invites clients to input their basic information and goals as well as fill out an appetite for risk survey. The adviser delivers recommendations, either face-to-face or remotely, while Advicefront also offers tools such as custom model portfolios, automatic portfolio rebalancing and automated annual reviews. “Most clients don’t have complex needs, so it is possible to automate steps in the advice process like going through basic goals. The tool is not prescriptive as to what level of engagement you have with the client and that’s what makes it exciting. It is not just a piece of kit.” These are the words of Finance & Technology Research Centre director Ian McKenna, who also highlighted the fact that this model is now leading the online advice market in the US, as I mentioned earlier.
Threat or opportunity?
Whilst online services are often perceived as a threat to the advice market, tools which can automate part of the process turn the trend into an opportunity.
This (online) advice experience is obviously very different from having an ongoing relationship with a financial planner, but that is not the target market.
It is also important to realise that not all consumers need or have a requirement for advice on every financial decision. At key stages of life, such as approaching retirement, you would expect consumers to benefit from full financial planning advice; however, for more transactional work, non-advised (or part-automated) channels will be appropriate for some.
I mentioned Paul Resnik earlier and I will now quote him: “Planning businesses have to understand their positioning and pricing in comparison to others and how they can improve their situation. The aim…..is for advisers to build closer relationships with their clients through superior personal service, more personalised portfolios and to differentiate what they do from robos”.
I couldn’t agree more. In other words, know your market and understand how best to develop and service it. In the future, in my opinion, most clients won’t be either “online” or “face-to-face”, they will be both.
The younger generations have grown up living a great deal of their lives online, and they will want and expect to be able to access some products and services in this way. But they don’t (in most cases, thankfully) live their whole life online. Sometimes they require or desire human engagement and involvement.
It is not advice, nor is it new. Be wary of headlines but be aware that increased automation is going to happen. Remember that it does not work for most financial planning needs, only for simple financial aims and requirements.
And never forget that financial services are, in many (if not most) cases, sold and not bought. Whether online or face-to face, you need to firstly obtain the client and then engage them in the process.
Just make sure that you provide advice and do not simply sell a product. A computer can do that!