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Nic Cicutti: Advisers could bite the dust if they put off robo-advice

Nic Cicutti

Look, can someone help me out here because I am struggling to understand all the apocalyptic panic about robo-advice.

Last week’s extensive lead article in Money Marketing refers, in depth, to the potential dangers of using an automated system to deliver advice to consumers. The first paragraph began: “Fears are mounting that the rapid rise of robo-advice has outpaced the regulator, risking unsuitable investment recommendations that advisers will ultimately have to pay for.”

The key implication is if a robo-adviser were to go belly-up, the cost would fall on the Financial Services Compensation Scheme – and therefore on advisers, in the form of higher annual levies. To a large extent, this is a misplaced fear.

Let’s take this argument one step at a time. Who is voicing these fears and are they justified? Who would be expected to pay the bill in the event of a robo meltdown? And are UK regulators doing nothing to mitigate the risks of this happening?

My guess is, initially at least, the burden of any potential compensation will initially be met by the big banks and other institutions which are far further down the automated advice route than even the white-label offerings potentially available to advisers. Yet, if anything, what is striking is how slow the process actually is: banks like Barclays, Royal Bank of Scotland, Santander and Lloyds Banking Group are the crucibles where the first viable robo-advice options to be placed in front of consumers are currently being forged.

But despite optimistic predictions at the start of the year of imminent launches, most are still weeks, even months, away from going live. It is likely further offerings by advisers themselves will be in the second wave, perhaps six months further down the line.

My conversations with individuals involved in the robo development process here in the UK is the slower-than-expected speed of some launches is down to a keen awareness on the banks’ part of reputational risk if anything goes wrong. This has led to detailed conversations with UK regulators about information-gathering, risk tolerance assessments, investment goals, appropriate research and, ultimately, portfolio creation.

The article acknowledges the experience of live robo-advice in the UK is so limited that there are, so far, no consumer complaints about the service coming through.

While the FCA has more limited experience of robo-advice here in the UK, they are clearly eyeing the US and Australia.

“What is striking is many of the issues Finra identifies are less to do with automation itself than with 1990s-style failings of not having appropriate systems in place to regulate human behaviour”

Money Marketing’s article spoke to eValue strategy director Bruce Moss, who was quoted as saying US regulators – namely the Financial Industry Regulatory Authority – are concerned at the “simplistic approach” of some robo services, which are “cutting corners aggressively”.

Moss says: “Finra is a much more relaxed regulator than the FCA, but what they are beginning to see is some of those US firms are not asking enough questions.”

Finra’s own report on digital investment advice, published in March, identified other issues too. It found “even when client-facing digital advice tools take a similar approach to investing, implementation of methods for specific investing tasks, for example, asset allocation, may produce very different results”.

The regulator quoted research which compared the asset allocation for a notional 27-year-old investing for retirement across seven client-facing digital advice tools. Equity allocations ranged as high as 90 per cent and as low as 51 per cent. Fixed income allocations ranged from 10 per cent to 40 per cent.

Finra’s research found there are wide disparities among firms offering robo services in terms of which of their staff were able to use the available technology in their dealings with clients. More worryingly, the report adds: “We observed a firm that, in addition to allowing registered representatives to use certain pre-approved tools, also allows registered representatives to add tools that are not reviewed by the firm.

“The absence of a process to review such tools raises concerns about a firm’s ability to adequately supervise the activities of registered representatives who use these tools, and is not consistent with the effective governance and super-vision practices described above.”

What is striking about Finra’s research is many of the issues it identifies are less to do with automation itself than with 1990s-style failings of not having appropriate systems in place to regulate the behaviour of human beings. Shades of Nick Leeson at Barings Bank, not to mention Peter Young at Morgan Grenfell.

The key issue, however, is whether the FCA understands the risks involved and is evolving strategies to reduce the potential for them to happen. I do not have an answer to this question, but would be amazed if it were not massively high up the regulator’s agenda.

My real worry in relation to all this panic about robo-advice is it might lead some advisers to downplay the role of – and therefore delay their own eventual involvement in – providing automated advice solutions to clients. That is not a viable strategy 10 or even five years down the line. If it happens, the danger is thousands of small advisers will bite the dust unnecessarily.

Nic Cicutti can be contacted at nic@inspiredmoney.co.uk

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Comments

There are 7 comments at the moment, we would love to hear your opinion too.

  1. Nic

    Re: your last paragraph in particular. I do think perhaps you might be on a different planet. When dealing with the better off (or to use that horrible euphemism HNW clients) these people have busy and stressful lives. The last thing they want to do (in my experience) is sit in front of a computer in their free time. (They probably do more than enough of that at work).

    As I have mentioned before, as a point of example. I and many others are more than capable of booking holidays on line, but we have a life. Lift the ‘phone, speak to my trusty travel agent. Tell her when I want to go, for how long and the budget – and she just sorts it. If anything goes wrong (it has happened) a quick call from wherever, and she sorts it. Travel details, transfers, car hire and anything else sorted automatically as she knows our preferences. Worth every penny.

    For the mass market – well perhaps the robots will have traction; but much more to the point, if smaller advisers insist of trying to trawl the mass market then indeed they are in danger of biting the dust.

    Readers may by now be bored of reading/ hearing this, but:
    Robo advice is to financial services what a rubber dolly is to sex. It might work, is certainly cheaper, but it definitely isn’t the real thing. Would you really want to try it?

    • I agree Harry getting something sorted when an automated system goes wrong is not easy. The problem is that many advisers talk about wealthy clients but in reality operate in the mass market

  2. I agree with Robert here many advisers do work in the mass market as there are only so many HNW’s to go round. What I have never seen in much of this type of correspondence is just how much money counts as a HNW?
    There is an issue here longer term though, most people with money are older, younger ones are poorer and see no reason to have an adviser, but younger ones are tech savvy, so when they inherit money ask yourself where are they likely to go, a few may go to an adviser, many more will simply go online because that is what they do for everything else – including holidays I am afraid Harry.

  3. David Bennett 15th May 2016 at 5:04 pm

    This reminds me of a S166 I was involved in some years ago.

    A customer with a smallish funds split into 3 funds. Why do they need a platform with access to 2,200 funds, with the resultant higher AMC.

    Firstly, they are unlikely to suddenly need/want to split their money into that holdings.

    Secondly, if diversification into more funds was needed, a stakeholder product, or an Investment Product which included Lifestyling would probably fit the bill at lower cost.

    The same here, for customers with simple needs and smallish funds, Robo Advice will probably be the way forward at a cost which is economic and the customer is prepared to pay.

    For a HNW/UHNW customer with bigger and more complex holdings, the full IFA will continue to have a role.

    There is little point trying to convince a bus driver with a small fund that he needs the full Rolls Royce product.

  4. To put it very simply; A computer, automated system or robot, cannot, I repeat cannot, give the wrong or bad advice ….

    The only thing it will fall short of is deviation !

    You cannot reason with a computer program, you cannot ask its advice, you cant argue ………. I do wonder how an algorithm will deal with a (so called) insistent client ?

    Best call Asimov, and get him to right the 3 laws of giving robo advice !

    Will we bite the dust Nic……….I cant see it, not in my life time.

  5. Julian Stevens 16th May 2016 at 9:52 am

    I’ve still yet to read any explanation of the difference between robo-advice and decision trees, and the latter was hardly a resounding success in terms of encouraging people to take out stakeholder pension plans. On what, exactly, is this newfound enthusiasm for decision trees based? Have any polls been undertaken to gauge public appetite for financial planning by way of online decision trees and, if so, what have the results been?

  6. Great article! Amazing to read all the objections and critisisms above. I would guess at least one or two of the above advisers are as “senior” as their client banks (same type of advisers who complained 5-10 years ago they don’t need to pass exams/qualifications due to their “years” of experience/20 yrs ago objected to commission disclosure etc etc) Like it or not, the future is coming. To quote Steve Buscemi in Armageddon “embrace the horror”

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