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Blog: Suitability rules are out of date for robo-advisers

Holly-Mackay-2013-700x450.jpgDuring the recent World Cup, I sat down to watch a few matches with my 10-year-old son, which also involved sitting through various gambling ads telling him what a cracking wheeze that was.

Once again, I was reminded of how easy it is for some to peddle financial rubbish, while investment firms need to plaster everything with that 4-letter word – “risk” – until potential customers feel like they’re about to abseil down a cliff. Blindfolded. On a piece of string.

During all our research, focus groups and interviews with consumers over the past three years, not once have I talked to anyone who was not aware that they could lose money on the stock market. We also know that for many, stock market risk only implies downside, gambling, loss and quite often, absolute loss.

Against this backdrop, no wonder 72 per cent of all Isa contributions go into Cash Isas making negative real returns. It’s safe to assume a decent chunk of these savings are long-term savings, which are not an active asset allocation decision but a passive decision driven by fear, lack of confidence, loss aversion and suspicion.

This 72 per cent figure is the biggest failure of our industry and a huge flashing red alert to the Treasury.

We need to make investing easier and explain it better.

Ian McKenna: Robo-advisers have no right to special treatment

Enter stage left the robo-advisers, the lovechild of regulation and technology. Robos were born post-RDR-type regulations, principally out of a need to service smaller accounts, busy investors and less-confident wannabe investors.

Although I see teething problems and a few rough edges, robo-advisers or, more broadly, digital investment managers, are a positive development to the retail investment landscape, offering diversification and ongoing portfolio management.

Any historical analysis of DIY investors will reveal an equity-heavy group, often with an acute home bias, lack of diversification and sometimes owning mostly shares in the company where they work. It’s not always pretty.

As for new potential clients, our recent analysis shows that non-investors think the FTSE 100 is a riskier investment than Amazon shares or other popular retail brands.

Diversification is neither understood nor easy to manage for the DIY investor and risk management is one of the most appealing things that robos bring to the retail table, evidencing lower maximum drawdowns than other popular DIY routes. This is positive, responsible investing.

Now let’s consider the suitability rules, as conceptualised pre-RDR and pre-fintech.

The requirements to check customers have knowledge and experience of investing are outdated. It is no different to asking people on NHS Direct if they are GPs or can evidence a working knowledge of medicine. Of course they can’t, which is why they are there in the first place.

Robo-rumble: Will FCA scrutiny stop digital services moving further towards advice?

As for capacity for loss, is it really necessary to check this for a new investor with £100? For someone setting up a monthly £25 direct debit? Of course we have a duty of care to vulnerable clients, but surely there is a materiality argument here. If we’re going to be consistent then let’s make everyone down the newsagents buying lottery tickets do the same thing.

The debate too often centres on whether new digital entrants should abide by the same rules as traditional advice businesses. This is a red herring. The real debate has to be what we do about anachronistic rules and why we make an investment portfolio harder to acquire than a trifecta at Ascot, a cryptowallet, a payday loan or a punt on Crowdcube.

As a nation we really need some radical thinking. Do we want to create an environment where people are perfectly wrong? Or approximately right? Right now, we are consigning too many people to the scrapheap of negative real returns with their long-term savings. Well done us.

Holly Mackay is founder and chief executive of Boring Money



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There are 15 comments at the moment, we would love to hear your opinion too.

  1. An interesting article Holly.

    In my opinion, there is a role for robo-advice although in reality, there’s not much ‘robo’ or even ‘advice’ in the process, more that it is a self-service channel.

    I’m with you Holly, for investors with small amounts of cash to invest, a self-service channel (I prefer this term as it is more a accurate description) is a perfect method to deliver and transact a service. However, when one is considering large amounts of money, e.g. when the loss may be enough to make one whince or worse, then the client should be offered and channel should advise a properly managed advice service.

    • ” a self-service channel … to deliver and transact a service” without advice would not be subject to the suitability rules that Holly is worried about…

    • I agree, it is a well thought out article. I also agree with you that the word “advice” needs to be dropped from this Robo channel so I agree with Harry too as a result. There is NO substitute for face to face advice. There are cost effective options which need more support and if they are described and titled correctly “self service channel” for instance, then advisers, whether they deal face to face of phoen to phone /video call to video call (both of which are good, but not as good)should and probably will support and encourage this channel as a first port of call much as we do PensionWise to people who ask for advice, but haven’t tried them first. Invariably people we suggest pensionwise to come back to us after they’ve used that service, but they then are better mentally prepared to accept that what they can get for free may be very good, but often it’s just not good enough or reassurring enough as being able to look in someone’s eyes, find out where they live and then hand over their hard earned money to someone to look after for them.

      • The anology with gambling and the lottery compared to face to face v self service channel is also very good.
        If you’re only taking a punt on a lottery ticket or putting £100 in a self service investment, then self service should be fine so log as you know the firm you’re dealing with in the latter case is on the FCA register. If however you’re talking about even £10k, let alone the £100k or more most IFAs deal in (most of us our average client is much higher than that and a £100k client or below isn’t far off being pro bono), then self service channels just will not give that peace of mind. It doens’t mean we’ll get anythinge extra for a client who might have gone “self service”, just that we might have advised them to go round the bear trap we could see straight in front of them they’d missed.

  2. Really valid views …. which will probably stand little chance of being listened to in an environment of burgeoning regulation (all in consumers` interest of course).

  3. No, not well done us. Just poorly educated public. Robo advice is no panacea. There really is no substitute for live, face to face advice with a human being. You only have to consider the robots answering calls to realise how hopeless this avenue can be.
    If you are to have regulation at all (which we need) then it has to be regulation across the board with no exceptions. Anything else is leaving the door open for gaming the system.
    Technology is fine as long as it is our servant and under our direct control.
    It is outlooks such as yours that has led to the venality of social media.

  4. Nicholas Pleasure 12th September 2018 at 5:41 pm

    Really interesting and thoughtful article. I’ve never understood why it’s harder to apply for an investment than it is a credit card.

  5. I see that the rules that cause problems for Holly Mackay are MiFID rules, so the options for change, while in the EU or maintaining the same rule book, seem to me to look limited.

    But while I have a lot of sympathy with the view that it should be harder to buy a lottery ticket, the fact is that few people spend money on getting advice to buy a lottery ticket… The suitability rules are about advice – the requirements for advisers to collect sufficient information to make a recommendation that is suitable.

  6. Absolutely right Holly!

  7. Good blog Holly. Wait for my seriously radical thoughts building on this theme at your conferenve.

  8. Great article Holly. This is the classic problem created by innovation running ahead of regulation and new ways of doing business having to be “shoehorned” into an existing regulatory framework which didn’t contemplate that innovation.

    To a certain extent that is inevitable and what is required is a responsive regulator that can play catch up pretty quickly.

    The FCA has been better at “innovation” in recent years and is clearly aware of the “advice gap” and trying to do something about it.

    As some of the other respondents point out in their comments, an alternative regime explicitly aimed at robo/automated services would be a good solution here and that would be entirely consistent with the FCA’s objectives and an appropriate level of consumer protection if correctly implemented.

    Trying to manufacture a solution that achieves the same objectives within the existing framework is more difficult and may be both stifling innovation and failing to serve those consumers currently sitting in the “advice gap”.

  9. The suitability rules should not be changed just because the current technology is not up to the job.

    Assessing suitability of advice is (currently) hard for machine learning software because it is so subjective and requires lots of fuzzy data.

    Machine learning IS very good at analysing vast amounts of data very fast. Which is why it’s best application is as assistant to human advisers (currently).

    • “The suitability rules should not be changed just because the current technology is not up to the job.” Completely agree – what’s wrong with providing suitable advice?

  10. Holly

    You may benefit from reading more articles in MM. Particularly: Ian McKenna: Robo-advisers have no right to special treatment.

  11. So if a human adviser makes a recommendation to someone with £100 per month to invest they should assess capacity for loss, but if a “robo adviser” does the same they shouldn’t? I don’t understand the logic.

    Also, why is it an issue that 72% of ISA contributions go to a Cash ISA? Why is that a failure of the industry? In adviser world we get used to dealing with people who have wealth, but some studies suggest that a quarter of the adult population don’t have ANY savings (and one in ten over 55’s). Everyone needs an emergency fund. These people should be putting 100% of their savings into Cash ISAs until they’ve built up a cash buffer. There’s no point them putting £100 a month into an asset backed option, diversified or otherwise, if they then need to withdraw that money to fix their car 6 months down the line. Especially if they then need to withdraw their money from the investment at a loss. That would just create lots of people having the experience of losing money. That WOULD be a failure of the industry. And it wouldn’t help create a culture of asset backed investment in this country.

    That is why capacity for loss IS important, especially if “robo-advisers” are supposed to be there to “help” people with the ability to only save smaller amounts. Arguably the assessment is more important for people in this economic group, not less.

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