The recent report from SCM Direct “Fintech Folly – The Sense and Sensibility of UK Robo Advice” makes interesting reading for many reasons. It puts forward valid arguments for closer regulatory scrutiny of the commercial models of start-up businesses, as well as the need for greater clarity around what is broadly called robo-advice.
This is all the more interesting as SCM Direct is a firm that would appear to fit into this category. Few firms call for more regulation of their own sector so this is a brave move.
While it is obvious to question the motivation behind producing research which challenges the commercial viability of many unnamed competitors, SCM Direct founder Gina Miller’s track record as a transparency advocate dates back long before the subject became as fashionable as it has recently. In this context her arguments should be taken seriously.
The report suggests many unnamed firms may not be economically viable and will burn through their financial resources before they become profitable. Consequently, the author suggests the FCA should do more to monitor the business models of these emerging companies.
I do not entirely share this view. In my experience the UK digital advice market is evolving far faster than it did in the US, not least because of lessons that have been learned there. Many UK start-ups are already following the US pattern of pivoting to focus on helping existing advice firms adapt to the digital world.
It is true that typically more start-ups fail than established businesses. This means they have the potential to place a higher burden on the Financial Services Compensation Scheme. One solution might be to apply a premium to their FSCS levy, but such a move would be very unpopular with start-ups. Given the Treasury’s clear desire to encourage innovation in this space, this is an unlikely outcome, especially given the need to retain FinTech businesses after the referendum result. Generally the FCA is finding a good balance in the way it is regulating such services.
I certainly agree with the report’s view that there is a need for more clarity around what different services are providing, and that the term robo-advice has been adopted too broadly and only serves to confuse the consumer.
You cannot get away from the fact that headline writers and art editors love the phrase and the negative connotations it conjures up.
In the case of SCM Direct, it is a non-advised guidance service, suitable for investors who know enough about financial services to invest on a DIY basis. It is important to have a way of recognising what different firms do and do not offer. Digital personal finance models are offering a far wider range of services to consumers, many of which would not previously have been offered by financial advisers but that would still be very valuable.
These will target different types of consumers, most of whom have never used or could not afford traditional advice. Using a range of different techniques these can guide consumers towards taking better financial decisions, taking more control of debt and enabling them to save confidently where they may never have been able to do so before.
Many of these services will use complex data analysis and artificial intelligence. In a broad definition they too could be called robo-advice but that would only confuse consumers more.
At a time when we need to be building confidence let’s not create more confusion, let’s stop using the robo term and start communicating more clearly what services actually offer.
Such capabilities will be especially valuable when it comes to educating the large numbers of people heading towards their pension freedoms. Applied correctly, they can make sure better informed consumers can limit the amount of time they may need to spend talking to an adviser either face to face or remotely, improving value for the client and profits for the adviser.
In recent months my colleagues have already built a model capable of highlighting in just a few pages the differences between the various players. This is now being adapted to a format designed to be easily understood by consumers and advisers alike. I will return to this subject in future columns.
Ian McKenna is director of the Finance & Technology Research Centre