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Ian McKenna: Nothing to fear from robo-advice

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Digital advice is commanding increasing attention from regulators, consumer journalists and even politicians. Multiple speakers at the FCA’s recent three-day forum on the subject made it clear that it is not a matter of if, but when, these services become a major force in the UK personal finance industry. The sheer number of start ups I am speaking to makes me sure we will see a tsunami of new services appear early next year.

One thing I do not understand is why so many really good advisers appear intimidated by the idea of digital advice. A couple of weeks ago, I was discussing the subject with Billy Burrows and Paul Lewis on BBC Radio 4’s Money Box. There is probably far more Billy and I agree on than disagree about. For example, we both believe it is really important for people to have financial advice and that we need to find ways to reduce the cost of that advice.

To me, this is what digital advice is all about. It can make advice a utility available to everyone, rather than a luxury reserved for the wealthy. Advice should be affordable, accessible and understandable.

In the UK, we have what many financial services regulators around the world increasingly recognise as the gold standard for advice. Our framework is so respected that it is being replicated in many other countries. However, this all comes at a very real cost: such advice is only cost effective for those with significant wealth. This is where technology can help. Not everyone has complex circumstances and, when they do, a decent automated advice process can identify if they need to be guided to more specialist, inevitably human, advice.

Digital services are available 24/7. Computers do not mind if the customer wants to go over the same information again and again until they are really sure they understand it. Customers can take their time to explore their options at their leisure.

Billy was clear during the discussion that advice is a journey customers will wish to consider over time. This really lends itself to using technology that enables the customer to review their options at their own pace, reflect on the information provided and revisit the process to study more. Indeed, digital Advice should complement traditional advice processes.

Cynics will stress that machines sometimes get things wrong. But so do humans. Technology and algorithms are improving decisions all around us every day in thousands of industries. Millions of options can be considered in seconds and the results presented and ranked. In fact, such services are ideally suited to supporting a financial advice process. No financial adviser with a good value proposition has anything to fear from digital advice.

While some services will seek to target consumers direct, digital advice pioneers in the US have learnt it is far better to partner with traditional distribution than compete with it. Helping advisers with clients deliver lower cost services is more economically viable than trying to attract them directly. Very soon, having software to deliver digital advice to clients will be as natural for an adviser as using a platform.

To make the most of these emerging opportunities, advisers need to be learning about the various ways digital advice can be deployed in order to select the best solution for the clients. I will provide guidance on the options, their strengths and their weaknesses in these columns over the coming months.

Ian McKenna is director of Finance & Technology Research Centre

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  1. Here are the reasons I fear ‘robo-advice’:
    1. I occasionally get the feeling that clients agree with me so they don’t appear unintelligent, even if I am explaining a fairly complex subject. When they do this they will often nod along and pretend they understand. I take this as a cue to ask them a question to challenge their understanding or to ask if there is anything they want me to go over again. Sometimes I give examples and if I feel the client can’t relate to the example I will give an alternative example, perhaps something from their own lives which I have picked up on during our conversation. I am able to do this by interpreting body language and tone of voice. Computers can’t do any of this. So clients may select the incorrect option and may not fully understand what they are signing up for.
    2. Questionnaires generally cannot be exhaustive. If I ask a client to complete a form, such as a risk questionnaire, they will often say “none of the above”. I can take this on board, make a note, ask the client to countersign the note and adjust my advice accordingly. Computers only accept yes/no or option 4 out of 5 available options. There is no in-between. There are two things to take from this: either the questionnaires under robo-advice will be very lengthly in an attempt to make the questionnaires exhaustive or there will be a fairly basic questionnaire where each question has a “none of the above” option. The former will be confusing, boring and clients will spend a lot of time trying to pick out the minor differences between each option. The latter will be useless – I can’t provide advice if a client just says everything is “not applicable” or “Other”.
    3. There won’t be enough “challenge”. Essentially robo-advice will actually be robo-execution-only-with-pointers. If I give a list of recommendations to a client they might not like some of them and, if left alone, they will only do what they want to do. Then it’s my job to ask why the clients don’t want to follow it, stress I have recommended it for a reason and ultimately get down to the root cause. I can give a personalised example of why they should follow my advice and link it to their own circumstances. My tone and inflection can help them realise what I’m saying is actually important and help them understand why it is truly in their best interests. A robo-advice service won’t do this. It will present a list of recommendations, maybe ask clients to type a brief explanation if they don’t plan to follow one of the recommendations (cue a blank text box or “N/A”) and that will be that. Clients might as well make up their own minds via an execution only service.

    Basically robo-advice will be inflexible but it needs to be flexible as no two people are the same. Also it lacks the human touch which is needed to hammer home a recommendation. So I don’t fear this for myself or my business. I fear it for the customers. The fact the FCA is seriously considering this means they know they created an advice gap after the RDR and they are willing to consider any alternative to plug this chasm.#

    My only (vain) hope is a separate FSCS class is set up for non-human advice so we don’t get lumbered with any future complaints. I’ll put this on my Christmas list to Santa.

  2. Well said Paul Williams. I can’t think of a single client fact-finding exercise I have ever done that didn’t involve nuance, checking for validity, challenge and reassurance. It’s a fundamentally human process.

    On the other hand none of this will make any difference and robo-advice will happen for political reasons. That does lead to a Catch-22 for the FCA. Either they run a system of dual standards where robo-advice has watered down suitability but face-to-face advisers have to comply fully. Or they water down suitability for all.

    Look back at some of the comments about the approach to things like risk and suitability letters made by Rory Percival over the last 2-3 years and ask yourself how this can be achieved with robo-advice. Awkward…

  3. Paul, I think the term Robo advice is a misnomer as there is precious little real advice being provided, more a low cost execution facility. I do believe however that the successful firms of the future will be the ones that are able to harness the efficiencies of IT for areas increasingly becoming commoditsed (such as portfolio construction, implementation, rebalancing and tax harvesting) and blend it with considered ‘real world’ counsel, empathy, guidance and leadership.

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