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Why Martin Wheatley was right on giving advice without human action

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FCA chief executive Martin Wheatley’s appearance before the Treasury select committee last week created something of a stir in financial advice circles. 

As reported in Money Marketing, when he was asked by TSC chairman Andrew Tyrie; “do you believe that financial advice can be delivered online without human intervention”, to the surprise of those present, and many who have read the press reports since, he replied “yes”.

To say Wheatley hit the nail on the head is something of an understatement.  It is not just that it is possible to deliver advice in this way; it is also the case that there is going to be no alternative to meeting the challenges of mass-market advice over the next decade.

Let’s first take a look at some of the stark statistics reported in Money Marketing over the last 12 months.  According to The Platforum there are now 14 million consumers in the UK with a risk based savings product.  According to a number of other reputable forecasts this number will increase to nearer 18 million by 2018 with the addition of auto-enrolled pensions. 

Now let’s take a few moments to think about what The Platforum means by a ‘risk based’ savings product. 

Surely by definition this means that someone, preferably in consultation with the client, needs to make some sort of trade off between risk and reward and decide how much investment risk is appropriate for that individual to achieve their objectives. Unless, that is, we want to go back to the dark ages when this sort of decision was made for millions of clients as a whole by the statutory actuaries of with-profits funds.

Meanwhile MM reports the number of bank and building society advisers now stands at 3,500, down from 8.500 at the end of 2011; and the total number of advisers now stands at 21,800.  

Even if we take an optimistic view that each of these adviser can serve 200 clients each per year, this covers a little over 4 million advice interactions per year at most.  If we then generously assume that the market for self-directed investors is 4 million, this still leaves a vast un-served market of several million clients.

Whilst we in the UK are blaming the RDR for this so called ‘advice gap’ other countries have woken up to the potential of online solutions to serve the needs of mass-market consumers. As Ian McKenna has been saying in MM pages for at least the last 3 years, online advice is happening in other parts of the world … and it is coming, via the internet, to a community near you.

Perhaps most surprisingly these so called algorithm based solutions, which use logic and the crunching of big data to put clients into low costs portfolios which match their risk appetite and their personal preferences, are in danger of making some face-to-face judgment being applied in the clients home look outdated and expensive.

No-one is arguing that a complex estate planning problem, or a finely balanced drawdown case, can be solved using a set of advice algorithms. Not yet anyway. 

But to argue that a simple Isa portfolio, or defined contribution pension portfolio, cannot be advised by a computer, is to forget that insurance brokers and travel agents have been largely replaced by online solutions, and that the professionals that have survived in those industries have had to transform their businesses to adapt to the reality of consumers who have access to all and more of the information they used to rely on to ply their trade.

On first read this article may appear to be something of a threat to face-to-face advisers. Nothing could be further from the truth. 

The challenge is not to face-to-face advice, which must surely thrive in an environment of under-supply and over-demand.  The challenge is to the financial advice industry to wake-up and develop solutions for millions of potentially unserved clients.

Andrew Firth is chief executive of Wealth Wizards Limited, which owns online IFA www.wakeupyourwealth.com

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Comments

There are 49 comments at the moment, we would love to hear your opinion too.

  1. I see Boots are offering an “on-line- execution only” do it yourself dental check up kit. (with instructions in pdf format)

    Advice and equipment supplied on polishing, descaling, fillings, root canal treatment and extractions, all from the comfort of your own home…….

  2. Andrew Firth is correct. Technology will have to be used to serve the needs of millions who will not/cannot afford to pay. Such guidance will reduce their chances of getting things wrong and will not be a threat to the majority of professional advisers.

  3. Why is it that those in power within financial services seem to always be wanting to change the rules to suit large companies like banks or even the likes of online providers like Hargreaves Landsdowne.

    Does the legal profession rely on a non face to face advice system, or the accountancy profession? The answer to that question is obviously not, so why is financial services unique? Could it be that those people in high places are more interested in lining up their next job for the organisations that they are looking to change the rules for? After all small advice practises are more than happy to provide advice to a wide range of individuals and RDR has made it easier not harder to offer that kind of service.

    I suspect the comment from Martin Wheatley about advice without human interaction has more to do with advisers like me writing to MP’s, the regulator and others asking a very simple question. How can online providers provide the amount of information that they provide without it constituting advice? Surely this activity contravenes the FSMA 2000 and 2012 on advice. In my opinion a decision tree is advice and should be covered by the same level of regulation and report writing that us IFA’s have to undertake. You cannot have one rule for one and another rule for your friends just because they are a bigger company with bigger invested interests.

  4. This should also reduce the compensation costs for remaining advisors as I expect clients will be responsible for their own decisions and can’t simply blame away any losses as has become the norm.

  5. Can’t wait to see the outcome of the ambulance chaser taking the algorithm to court over bad advice.

  6. Do I live in Cloud Cuckoo land or do they?

    All this pre-supposes that the so called disenfranchised are queuing up with unbridled eagerness waiting to purchase financial products.

    From where I stand nothing seems further from the truth. My experience indicates that:

    a. They don’t have the money in the first place
    b. They are not interested and any spare cash is spent on fags and booze.
    c. Their preferred financial investment product is the Lottery.

    Even supposing that these people are only partially correct and that on line facilities will be popular – I wonder how the FOS, FSCS and the FCA are going to squeeze compensation from a computer?

  7. Do you actually know how a computer works?

    Any “online” advice system has to have been written and designed by?

    A human!

    So therefore the decision tree is a “human’s” opinion on which direction any question asked and answered should go. Thus a firm running an online system by default is giving advice and a real person is involved.

    At some point there will need to be other points of contact with real people. The system also need to be maintained by humans.

    I personally am not bothered about the “mass market” as generally those people don’t want to engage in the financial planning process and pay any money for it. Isn’t that what MAS is for?

    On New Years Eve i was talking to one of the “mass market” and he spent rather a long time telling me about his pension portfolio (£38k) and his life assurances plans and what did I think he should do? I gave him a card and said ring me and book in an appointment and I will gladly discuss it with you.

    “Will that cost me?” was his first question. My first thought was I hope he doesn’t ring me! Why? Because 25 years in this profession tells me already he’s not someone I want as a client. There are a lot of people who know the cost of everything and the value of nothing. So, if you want to design and build a system for those people then good luck to you, but they will never be long standing clients who work with you, in time they will just move along to somewhere else that does it cheaper.

    You’d be better advised to spend your time and money to develop face to face, long standing relationships and develop professional connections.

  8. @advice1 although I find your comment nonsensical, lets just assume that Boots were offering the Do It Yourself dental kit, and lets just assume that you are in need of some dental surgery – would you go to the dentist for a simple procedure and pay, lets just say, £400 for the simple procedure or, would you (and lets now assume that you are fully able to complete the simple procedure using the DIY Boots dental kit) save yourself a few hundred quid and carry out the procedure ‘from the comfort of your own home’?

    From what I have read and heard no one is saying that the more complex advice process should be completed without suitable advice but the straight forward transactions which are being placed by those that are happy and confident to do so and understand what they are doing could and possibly should be tailored to an online offering.

  9. Quote: “Now let’s take a few moments to think about what The Platforum means by a ‘risk based’ savings product.

    Surely by definition this means that someone, preferably in consultation with the client, needs to make some sort of trade off between risk and reward and decide how much investment risk is appropriate for that individual to achieve their objectives. Unless, that is, we want to go back to the dark ages when this sort of decision was made for millions of clients as a whole by the statutory actuaries of with-profits funds.”

    So an individual has an “objective” … and it is hoped a computer based algorithm will solve the ratio of risk and reward in achieving that objective … many who took out mortgage endowments had such an objective, paying off their mortgage … the result of their placing their trust in the industry to help them achieve their objective is only too well known, and yet here we are apparently lessons unlearned, now apparently assuming an algorithm will resolve the ratios required.

    LTCM crashed on that belief, and nearly 100% due to their trust in algorithms.

    The future is unknowable, and because not everything in the future is predictable, it is simply erroneous to believe that what may seem desirable on day 1, will remain so, even on day 2, let alone over a passage of many years.

    To achieve any objective requires a continuing awareness of change, and the ability to adapt to such change … will the “algorithms” recontact the consumer each and every time it establishes a change and a variation in the risks and the rewards. Or will it just “advise” its new clients, wholly differently from those it “advised” a few months ago?

    If so, would that not constitute “advice”?

    If not, would you trust a computer programme that has been designed to abandon you when perhaps you most need “advice”?

  10. I read this and thought this is well reasoned, then I got to the end and noticed the man runs the online situation he is endorsing.
    No coincidence there then.

  11. Of course Mr Wheatley is correct. Execution Only involves the individual deciding what they want and then asking a company to execute it; there can be no element of bias or persuasion. Any process that is designed to “guide” the individual is NOT execution only, by definition, as it is not solely execution.

    While it may not be considered as advice by an IFA, and is a grey area in between, under FCA rules, where there are only the two options of advice or execution only, then it has to come under advice.

    My personal belief is that unless the individual asks for a product without any influence at all, it can not be execution only.

  12. The reason why people like Martin Wheatley and Andrew Firth have such blinkered views is that they really do believe that everyone either is or indeed should be just like them. Thats why Mr Wheatley doesnt feel he should pay back the £119 Million that advisers have been overcharged in the last year but he does think its OK to send part of his Jolly boys club on an “Away Day” costing £15000 of our hard earned money. These people are not in the real world. Reality is that there are some people who would happily conduct business on line and need no adviser help. There are some people and Im talking educated middle Income earners who wouldnt dream of “do it yourself “and wouldnt know what a “simple Isa portfolio, or defined contribution pension portfolio” was if it bit them on the bum!! I know, because I see them every day of my life- thats why they use me and thats why they put their trust in me- these people are the majority. The average Doctor and Dentist hasnt a clue how their own pension scheme works. So, Wheatley and Firth, blinkers off please, step out of your fluffy worlds and speak to some real people, it would do you both a power of good.

  13. The following direct quotes from the FSA Suitability Guidance may raise some questions about on-line advice and how it can square the regulatory circle:

    “Some firms unduly focus on the risk a customer is willing to take and fail to take sufficient account of
    the customer’s other needs, objectives and circumstances: for example failing to consider whether the
    customer would be better placed repaying debt, or failing to select an investment that meets a
    customer’s need for access or the term for which the customer wishes to invest.”

    “Tools can usefully aid discussions with customers, by helping to provide structure and promote
    consistency.”

    “Where firms use a questionnaire to collect information from customers, we are concerned that
    these often use poor question and answer options, have over-sensitive scoring or attribute
    inappropriate weighting to answers. Such flaws can result in inappropriate conflation or
    interpretation of customer responses.”

    “Information regarding the investment objectives of a customer must include, where relevant,
    information on the length of time for which they wish to hold the investment, their preferences
    regarding risk taking, their risk profile, and the purposes of the investment.”

    “Part of the skill of an adviser or discretionary manager is considering and evaluating different pieces of information to form a recommendation for the customer. It involves weighing up the advantages and
    disadvantages of alternative solutions by making trade-off decisions that best meet a customer’s
    investment objectives and reflect their financial situation.”

    “By bundling information on different factors together, the value of each distinct piece of information is
    potentially lost because arbitrary weightings are applied to different factors which may negate a
    preference or need. This can result in output that does not accurately reflect the trade-off decisions
    that a customer is willing or able to take. If such an approach is used, the tool, or wider suitability
    assessment process, needs to be capable of accounting adequately for each of the different pieces
    of information.”

    “It is important that advisers and discretionary managers consider the knowledge and experience of
    customers and properly discuss with customers the nature of the assessment of the risk they are willing and able to take. This enables firms to secure customer engagement and check understanding.”

  14. I agree with Andrew Firth, in as far as there is definitely a market for online DIY services and i can only imagine that this market is going to grow. Where i differ from his views is where this market falls, is it advice? In my opinion it isn’t. Advice is much more than saying “put your money in here”. It’s about investment aims and goals, educating clients and, as Grey Area’s post alluded to, the trade off between what clients want and what their circumstances allow.

    I have worked in an environment where facts are put into a computer and the computer then decides what a clients ATR and ultimately capacity for loss are. In certain circumstances (quite a lot actually) the computer wouldn’t allow an investment to be made but a client still wanted to. What will happen in these circumstances?

  15. correlationstreet 11th February 2014 at 12:37 pm

    Dear oh dear – somebody says algorithm and up pops good old LTCM. There are good rules based solutions and bad ones, just like pretty much everything. I commit my capital to a systematic, cross-asset process (that I understand) that has hard limits on risk asset exposures and does not use forward looking assumptions on correlations and which offers tail risk protection over the cycle. They do exist and can only exist so long as humans are on the other side doing what humans do – over reacting to information, over trading, herding in response to fear & greed. Risk is a movable feast, the oft used mantra that bonds are less risky than equities means nothing when it is predicated on historic data as we may all experience over the next 20 years.

  16. Does this mean that the outcome of the thermostatic review on advice and platforms has been pre judged before it reports?

    It’s quite obvious that Martin Wheatley has a particular bias towards execution only models or decision tree methods of giving advice. Surely the FCA job is to set rules that allow the industry to evolve, there is no point in banning commission for advice sales whilst allowing commission for non advice, this is just illogical.

    What is needed is to ban commission full stop and stop using phrases like “guidance” or “non advice” for online information services. The only phrase these sites should be allowed to use is “information only” and they should only be allowed to sell the simplest of products. In my professional opinion there should be no best buy tables or videos linked to best buy tables. If a client wishes to take out a platform product on their own then they should have a list of all of the funds available and a simple fact sheet for each fund and then make their own decisions as per the rules on execution only.

    If the client wishes to enter into advice, or helped research service then this is deemed to be advice and is charged for in the post RDR world. Surely this is an easy concept for the consumer to understand, and dare I say it, the industry.

    Is it me or is it just the vested interests of those up top who seem to be missing the point when it comes to the word “ADVICE”.

  17. It’s not advisers that need to be persuaded of the merits of online automated advice, it’s the FOS.

    Client: “I was told to buy these funds but no-one conducted a full fact find, told me I should pay down debt, discussed what “low medium risk” meant or asked whether I understood what I was buying. Now they’ve gone down so I sold them.”

    FOS: “Insufficient KYC, full redress plus compo. Next!”

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  28. I don’t get it – technology is an enabler, whether thats on-line planning tools, advice provided using web interactive technology with or without human interaction (i.e. data, image (photo or video), voice, pdf documentation), or straightforward request to execute only – protection or investment. The enablers are there, the consumers mostly (50-75% Tablets/Smartphones) have the technology, so why don’t the distributors/advisers/providers? Convenience and full audit trail makes it easier all round and safer for all – the biggest barrier to change is just that, the thought of having to change. Do it with your adviser but don’t plan to make time for travel and shared coffee, do it in the comfort of your own home/office mutually. Its 2014 not 1994.

  29. Any of you who have been to the recent roadshows conducted by the FCA will be know one of the first things that gets rammed down your throat is “don’t” rely on technology !!!!

    IT is there to aid you but its not the be all and end all in the sales process !!!

    But hey ho isn’t everything that comes from the regulator double dutch ? it never make sense.

    Is this about RDR ? maybe not; but its one of the long list of unintended consequences !!!!

  30. As I have said on previous posts if on-line advice without human intervention was easy why did the FSA give and go down the decision tree route for such a simple product as a stakeholder pension?

    Also a lot of people seem to mixing up advice with information and guidance.

    I think what has happened here is that the FSA/FCA realises that it made a big mess with RDR and is hoping that on-line advice will save the day. I am sure that all the banks with there big pockets would have developed the systems by now if they thought it was a viable prospect.

  31. The abominable aspect of all this is that the mass market will be expected to use technology rather than be encouraged to take advice. With technology it is easy to overlook other aspects of financial planning, to ask the questions that experienced advisers ask in a broader context. My fear is that technology is a hybrid restricted advice / execution only model.
    From the FCA perspective technology gets them off the hook because it will appear that the mass market is actually receiving advice – which after all was the aim of the RDR. But how do you measure the quality of the advice given using technology? It still requires consumers to recognise their issues, problems and needs before technology can be used to help resolve them.
    And when advice is given how do you actually check the quality? You cannot – only that in respect of the limited advice given. At least the consumer has to accept responsibility for not taking action elsewhere.
    We had an example this week where a client came in and wanted some simple investment advice. By the time he left us he was tasked with a raft of questions to sort out and things to consider, issues he had never even considered. The investment will have to wait. Will technology ensure that he gets the best advice? No. Do the FCA care – no. As long as the mass market has access to “advice” and if it is inappropriate the FCA can simply blame it on the consumer.

  32. Given the number of cases on which the FOS has determined that Exec. Only, however robustly documented, is no defence, I think Sascha Klauß’s comments are salutary. Over the years, I’ve arranged just a couple of straightforward Best Execution cases (ISA’s for chartered accountants and/or their spouses), but what if the client (or a CMC on his behalf) raises a complaint on the grounds that he should never in the first place been categorised as an Exec. Only investor? Some years ago I was offered a referral to a barrister who wanted to vest his pension fund at the age of 53 (just a month or two before the minimum age was raised to 55) by way of an enhanced/underwritten annuity. He’d already found a deal he wanted with one of the providers operating in this market but they were insistent that they accept business only via authorised intermediaries and I was forewarned that he intended to drive as hard a bargain as he could get with whichever IFA he appointed. I turned the referral down.

    From a DIY complainant, you can just imagine the presentation to the FOS. I had no experience of investments. I didn’t realise the complexity and risks of what I was doing. Nobody told me I should pay down my overdraft before investing. I didn’t understand/ have time to read all the pages of material that were e-mailed to me. My queries weren’t answered satisfactorily/with sufficient clarity. The benefits of doing it largely by myself without face to face advice were inappropriately emphasised over the potential pitfalls.

    The determination of the FOS would be a virtually foregone conclusion.

  33. The market surely exists for both propositions and in the end the consumer will decide – the facts as I see them:

    •The percentage population with regular access to an Adviser is half what it was 15 years ago and continues to decline
    •The quality of F2F advice is not improving, it is declining (generally) due to:
    – under-supply and over-demand leading to laziness on the part of Advisers
    – over enthusiastic compliance functions complicating and confusing best advice
    – the over popularity of networks providing light touch guidance to practices allowing them to perform badly and not develop
    – Banks and others historically giving Financial Advice a poor reputation

    •Andrew Firth is well positioned to comment on the topic of online advice as he was at the forefront of online and telephone investment offerings some 15 years ago as well as leading a large IFA network and does truly believe in the market and need for both offerings.

    Darren

  34. headbelowthe parapet 12th February 2014 at 11:43 am

    D2C algorithm based services can only be as good as the level of engagement that the consumer decides to give the process, and of course as the algorithm itself. But, sadly most people simply aren’t bright enough or interested enough to be able to participate properly.

    How many consumers will want to fully educate themselves on the concepts of asset allocation? How many will bother to fully get to grips with identifying their own risk tolerance and ability to absorb losses, let alone be able to grasp the subtle nuances that can alter the broad brush approach that most risk profiling tools employ? And, if they do manage to do this how many will then want to learn about the different approaches, products and their taxation status’, and about the different investment sectors and styles, fund types and management approaches?

    And, if a competent individual does indeed decide to take this approach surely they’ll be savvy enough to recognise the fact that they will then preclude themselves from participation in the ‘guaranteed advice’ model offered via the FOS, FCA and our PI cover.

    I suppose the answer is to target fairly stupid people and take the commission.

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