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Robert Reid: Robo-advice is a backwards step

ReidRob

The continuing discussion around embracing robo-advice solutions seems to ignore the fact that a large portion of the (disengaged) UK public would need to see financial preparation as a must do in their busy lives for it to really take off. I remain unconvinced.

Perhaps more importantly, however, with such an obvious focus on product today, exactly what we are expected to pay for confuses me. Any of the solutions I have looked at are less than evolutionary. If anything, they are a backwards step.

In recent weeks, planning software providers have been telling us why they are indispensible in the new pensions world, particularly where they provide a market leading economic modeller. I can only presume they now provide a detailed explanation of how it works and who determines the optimum assumptions and mix. After all, advisers are required to know how it works if they are to rely upon it, otherwise its non-compliant.

If they remain “black boxes” then, frankly, they are of no help at all. I still recall one organisation offering a with profit bond analysis, where the front page of its output stated “Not for client use”. Really? What planet are these people from?

I have a message for these providers: take responsibility or take a hike.  Why should I, or any adviser for that matter, pay for something where I do not know how – or indeed if – it works.

Yes, we need good tools but we do not need ones we are not able to understand, that do not remove risk or that do not deliver a solution. We certainly do not need ones that provide information on which we cannot rely or take action against if it proves to be inadequate or inaccurate.

This is not a new issue. I am exasperated by the thought that 10 years since I first debated this very problem at an actuarial event in Edinburgh nothing has changed. We need better conversations about risk. Anything that facilitates that is good but anything that does not is just expensive clutter.

Advisers will not be replaced completely by robo-advice as the latter is like the Daleks: they do not do the financial planning equivalent of stairs. Until they do, we are safer than some may suggest.

People need planners that challenge them. The investment approach may be passive but, if you truly wish to add value, your planning and your discussions with clients must be anything but that.

I once asked an audience of IFAs who had recently disagreed with a client. Few admitted to it. People will only value planning if we challenge them and make them think longer term and with more emphasis on the difficult life choices. The choices that require good quality debate and discussion make the robo-advisers pale into insignificance.

The reason that providers are so for the recently announced review into advice is that they hope to get back into the driving seat for control of distribution. Once again it is product first and the client some way behind. Financial planning is a bit like interior design, where the benefits become more apparent over time: a level of patience that few, if any, providers have.

In my world, planning is strategic, advice is tactical and sales… well, it is best described as random. The economic model guys have random at their core, with tactics less evident. Until we know how they work, they remain of little strategic use.

Robert Reid is a director at The Ideas Lab

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Comments

There are 5 comments at the moment, we would love to hear your opinion too.

  1. Robert, I see two things in relation to this issue.

    1.) Most advisers do not offer proper Financial Planning, do not really understand what it is, or why it is of massive benefit to clients. Consequently they have a hard time showing the benefits they can bring to clients and the value they add.
    2.) Even if the public at large were sold on the benefits of planning and really bought in, many simply cannot afford it, even though they do need it, possibly more than those that can afford it.

    Its scenario 2 where I see Robo advice potentially fitting in, not as a replacement for proper planning, but as an alternative option for those who cannot afford to pay our quite rightly higher fee’s, but also used with Planners and with pointers to those clients who would benefit from speaking to a proper planner.

    As to challenging clients, I do find it rather ironic, that it’s in this specific area where planners can add the most value for their clients, however I see no reason why a Robo Adviser done right could not challenge clients where appropriate.

    • Hi Duncan would appreciate seeing your research evidence that has allowed you to conclude “most advisers do not offer real financial planning” as that is quite a bold statement. In reality I suspect like most highly opinionated advisers (and the author of this piece) you have just made another rash statement without foundation based on your personal beliefs.

      Like all professions there are elements that can be automated or redesigned to allow low level employees to undertake (tax returns, conveyance, portfolio selection and rebalance etc.) which are all perfect for “robo-advice” although all still need input from a skilled person at some point.

      Furthermore it has been proven (evidence can be provided if needed) that most algorithm based solutions normally beat an “expert” when making predictions or recommendations. Indeed it is not too hard to program a bot to advise me on my ideal level of pension contributions, investment mix, best savings accounts, life insurance etc. based on certain inputs. Which to be honest is what most people need. (although LV have so far struggled to get a similar type of service at a very low price to pay yet)

      The irony is though where robots will struggle to replicate advisers is where experienced advisers can add the most value, in discussing the nuances and subconscious personal issues that only a conversation with a skilled professional can pick up on. The problem here though is that the financial planning “profession” has turned most people off this approach because of the use of financial planning “Trojan horse” to sell products via slick sales people and techniques.

      All in all I do not think an army of robots is going to increase the levels of financial planning people receive (although I believe they will replace many advisers in the near future), I think a more radical approach that includes level 6/7 qualified Financial Planners freely available via skype/telephone as part of their online service that are not incentivised to sell products will. And the first company to get this right will clean up (in my humble opinion).

  2. The more I read about this subject the more I think our “April Fools” Joke hit the nail on the head https://www.youtube.com/watch?v=aO8opERuypc

  3. chris gilchrist 27th August 2015 at 2:29 pm

    The real question is whether the regulators will allow robo-advisers to operate on a ‘black box’ basis- if they do, they must ensure the operators of the service are on the hook for all failures. Plus a requirement that any black box has to be explained in terms the layman can understand.

  4. Thanks Chris that was my key point we need to know how something works/or doesnt.
    The idea that they dont tell then dont take any liability is the actions of a minor and makes their contribution irrelevant. As to Tony’s comment that I am opinionated – that is my role as a columnist nor are my personal beliefs the sole source for them, pre RDR, in the Ideas Lab (the consultancy I operate with Roderic Rennison), we worked with many firms and those projects involved over 3000 advisers in total, I would argue that is a reasonable sample with no pre selection on my part. I do however agree with the use of non face to face operated by real advisers that is a real opportunity and one I m working on already and will provide more info in my next column.

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