View more on these topics

Ian McKenna: A lesson in how not to provide automated advice

Ian-McKenna-in-2013-700.jpg

I am spending an increasing amount of time looking at new automated advice propositions. I am impressed by what I find but this is not always the case. I am not going to name the service I am concerned by but I will say it describes itself as a digital wealth manager, has direct FCA authorisation and is currently accepting customers in the UK.

It is widely recognised to attract customers online you need to have a user-friendly experience. In this case, the service is certainly slick. Having entered an email address and password to register, users are taken to a simple personal information screen.

This captures very basic information, such as the user’s marital status, whether they have children and the source of the majority of their wealth (the options being savings from income, inheritance or donation, sale of goods or other). It also asks if the user is a US citizen.

Five questions are asked to measure risk appetite followed by a further five to understand the investor’s knowledge and experience. Finally, four more are asked about the user’s financial situation. These identify the level of assets, excluding the family home, the level of taxable income and the source of that income (the options being retirement, employment, self-employment, and investments or properties).

At this point the system told me I am an adventurous investor, even though I selected the “strongly agree” response to the statements “I prefer to make safe investments even if that implies lower returns” and “When I start losing money I tend to sell immediately.” To be fair I had also chosen “strongly agree” in response to the statements “risk does not worry me. It is the best way to maximise the probability of returns” and “I am comfortable that in the case of a negative market trend some losses may occur.”

To be clear, I was deliberately entering answers I knew conflicted because one of the issues the FCA is concerned about when it comes to risk profiling tools is the process used to address inconsistencies.

My understanding is it expects advisers to identify such situations and clearly document how they have addressed them. Because of the nature of digital advice, this is a major challenge to firms seeking to operate in this way. In this instance, there appears no obvious way the service is meeting this regulatory requirement.

Having been told their attitude to risk, the user can revisit their answers. On the same screen they are asked to accept the terms and conditions of the service, which are displayed in a smaller window the user can scroll through.

After this, users are asked to choose between a stocks and shares Isa and a general investment account as their product wrapper. From the investments option they are taken to a page where they are asked to enter how much they want to save and for how long, and are given the opportunity to finetune the level of risk taken by the investment. This creates an illustration of the potential growth of the investment. A further tab shows the breakdown of the asset allocation.

Users are then asked to enter their bank account details. The firm’s helpdesk told me this is not to take funds but to conduct anti-money laundering checks. However, this information is far from clear on the site and further complicated by the fact a message on the service’s iPhone app shows money in the account with a message stating: “Awaiting funds. Please allow two working days for your money to appear.”

During the process I received two emails from the company: the first a general welcome email, the second telling me my portfolio had been set up. Looking at the frequently asked questions for the service, the response to the question “Do you give investment advice” is clearly yes. However, on the basis of my experience, what is on offer is well below what I would expect from a traditional adviser and indeed what I have seen from many automated advice solutions.

To have reached a point where a system is giving the impression it is taking money from a bank account I would expect to have seen a summary of the recommendation, with reasons behind it. The process I experienced did not appear to explore either my capacity for loss or the risk required to achieve my objectives. Indeed it did not appear to even identify my objectives, and the lack of a process to address the conflicts in the risk profiling response appears to fall short of my understanding of current FCA requirements.

In my opinion, it is essential there is a level playing field between traditional and digital advice. Consumers should be able to expect the same adherence to regulatory requirement regardless of the channel they use. Many digital advice firms I have come across are striving to do this but, on this evidence, others must do better. Indeed, I would question whether this service in particular should be live in its current state.

Ian McKenna is director of the Finance & Technology Research Centre

Recommended

House-Keys-Mortgage-Estate-Agent-700.jpg

PRA proposes minimum buy-to-let underwriting standards

The Prudential Regulation Authority wants to strengthen buy-to-let underwriting standards by insisting on a minimum level of stress testing to ensure loans remain affordable when rates rise. A consultation paper on the future of buy-to-let underwriting says the market is defined by short-term interest-only mortgages that leave consumers vulnerable to hikes in base rate. The […]

Old Mutual Wealth 2014

Private equity bidders circle Old Mutual Wealth

A number of America’s biggest private equity firms are preparing bids for Old Mutual Wealth, the Sunday Times reports. The wealth division is said to be the most attractive to buyout funds following the announcement the Old Mutual group will be split into four businesses. Firms including Advent International, Bain Capital and Carlyle are weighing […]

Why advisers trump robots on plugging pensions advice gap

People – not robots – are the answer to Britain’s emerging retirement advice “vacuum”, as firms learn how to outsource their investment processes and delegate research to paraplanners. That was the conclusion of panellists at Money Marketing’s recent roundtable on retirement advice. Servicing less profitable, lower-net worth-clients is one of the biggest problems facing the […]

Iain Chadwick

The Budget 2015: a brief overview

Following George Osborne’s delivery of his sixth Budget as chancellor and the last of this current parliament, we have provided a brief overview of the initiatives put forward in his statement, focusing on the topics that have an impact upon the pensions landscape, savings, personal taxation and businesses.

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

There is one comment at the moment, we would love to hear your opinion too.

  1. Interesting find – there is at least one similar proposition (I forget which) that *does* flag up inconsistencies and asks you to rectify them before proceeding. Seems like a far better system.

Leave a comment