At the beginning of the month, Nick and Martin Bamford caused amusement around the industry by announcing the launch of Informed Choice’s robo-adviser as an April Fools prank. What many in the industry might find scary, however, is that they are not too far away from the truth. The emergence of real robo-advisers is, in all probability, closer than most expect.
The pejorative “robo” term emerged in the US a few years ago when the traditional advice sector had yet to work out how to respond to the emergence of low cost automated “advice” solutions.
In their earliest incarnation the US direct to consumer propositions offered very simple risk profiling aligned to portfolios made up largely of passive beta ETFs. Today, there are a far wider range of offerings that enable advisers to deliver scalable advice reflecting any investment strategy a firm wishes to follow.
To be fair, I have yet to see any US digital advice service that would be capable of meeting the considerably higher UK regulatory requirements. In this piece I am going to focus on robo advice in the UK.
To me, the critical question is not if automated advice will emerge in the UK. To a small degree it already has. Instead, the question is can this be a positive force in the evolution of the financial advice industry and help us deliver better advice to more people at lower cost? The answer to this must be a resounding yes.
Let’s be really clear, I am not saying that today you can build an automated solution that will be able to assess very complicated financial needs and generate recommendations. What is possible now is to create digital services that guide consumers through a process to identify if they are suitable for a particular investment and screen out those who are not.
Nutmeg has been the most active automated advice play this side of the Atlantic. It offers a very user-friendly solution with a great user interface but charges are perhaps not as low as they could be. The flat 0.35 per cent from competitor rplan looks keener but it does not seem to have been able to grab consumer attention in the same way as Nick Hungerford’s Nutmeg team. Let’s be clear, though, both of these are really robo advice 1.0.
Against the background of the sort of messages coming from the Personal Finance Society, which is rightly working closely with both the FCA and FOS, I think they are going to need to evolve their models to focus far more on suitability and customer outcomes over the next couple of years.
Most of the other digital plays in the UK are appearing out of the adviser community and it is these I believe have the greatest potential. Wealth Wizards has been doing a great job in building a compliant digital advice business. Parmenion’s simplified advice tools are also an excellent example of how you can deliver an automated process that meets UK regulatory scrutiny.
The leadership being given by the PFS can be a really positive step for the intermediary community and will help make digital advice a reality. The PFS is being very clear that in a post-RDR world where advisers are focusing on the financial planning process there should be no need for an adviser’s remuneration to be linked to or contingent upon the execution of the advice.
The vast majority of consumers are going to want to have some human involvement in their advice process for some time yet but financial advice is in fact ideally suited to being delivered through a series of structured processes. If delivering these digitally can reduce the cost of advice and make it affordable to more consumers is that not a good thing?
This need not threaten advisers who choose only to deal with wealthy clients that prefer a personal experience and can afford it. At the same time, however, it can help those firms that want to support a wider customer base.
It took the US adviser community three years to recognise that automating much of the advice process is actually a good thing. Solutions are arriving today that can help those advice firms who want to provide a digital advice process. I believe many UK firms will grasp this opportunity far more quickly than our American cousins.
Ian McKenna is director of Finance & Technology Research Centre