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 firstname.lastname@example.org