Robo-advice is here to stay. It is eating up market share and traditional advisers should be worried. Or should they?
The definition of advice has been under much discussion. If we use the definition that relates to a “personal recommendation” it is worth considering whether the term “robo-advice” is giving the wrong impression. Some of the firms in the space have indeed distanced themselves from it.
That said, they still appear to be making use of search engine algorithms. If you type “robo-advisers” into a search engine, the results page will be filled with numerous options to choose from and articles analysing them or putting them into league tables.
If you start trying to set up an account with one of them, however, you will in most cases be informed early on that the firm is not offering or providing advice.
On one firm’s landing page, it uses the term “digital wealth manager” – not quite as catchy but it lessens the chances it could be seen to be misleading customers. And that is a crucial point: the possibility that robo customers think they are getting advice or receiving a recommendation could be misleading.
How much faith are people putting in the system and what level of protection do they think they are getting?
This is not the only risk these firms face. Take a closer look at the risk profiling techniques they employ. If these providers were giving advice, they may want to examine the regulator’s FG11/05 paper, which looked at some of the risks of firms using third party risk profiling tools.
The possibility that robo customers think they are getting advice or receiving a recommendation could be misleading.
The FCA highlighted that poor outcomes can occur if firms:
- Use tools which are not fit for purpose
- Do not understand how a tool works or its limitations
- Fail to mitigate a tool’s limitations within the suitability assessment
If it is not advice, then suitability does not apply. But firms still need to be mindful of the systems and their limitations. They should ask themselves whether the system picks out anomalies in a customer’s responses and identifies where the customer may have misunderstood the question.
When testing these tools, one provider we looked at highlighted there were inconsistencies with our answers to the risk profile questionnaire and our chosen risk profile, but it did not highlight what these were.
It also did not prevent us from setting up the portfolio, simply asking for confirmation we understood the risks. In the absence of any explanation of what these risks were, it is questionable whether this approach goes far enough and provides sufficient protection to customers.
Robo-advisers should be looking at their tools and ensuring they have controls in place to mitigate such risks. The benefit robos have is that their systems are automated and they can easily identify those customers who give responses that do not fit their target market or chosen investment portfolio.
In those instances, they need to have a robust exceptions process. All firms should monitor their customer journey and conduct outcomes testing to ensure no systemic risks exist within their model.
So despite the column inches dedicated to the rise of robos, only by implementing controls and holding themselves accountable to the same standards expected of traditional advisers can such firms ensure their products are truly seen as challengers worthy of their current reputation.
James Kelly is senior consultant, advisory services, at Huntswood