A robo cop-out?

There is growing interest in the use of technology to deliver financial guidance to consumers at a lower cost than that provided by increasingly costly human advisers, and it is worth noting that the FCA has already shown interest in the concept of robo-advisers. Several adviser firms have begun pilot robo operations and there are already some well-known firms such as Nutmeg and others running limited guidance, technologically-based operations. These may increasingly dominate the lower and middle end of the advice market.

In essence, these robo-adviser operations offer this promise to consumers: “You do the hard work of entering your financial details, assessing your risk appetite and so on and we’ll recommend some robust investment and pension ideas for you and keep you up-to-date on how they are performing.”

Given the rising cost of providing good quality, human financial advice we have to accept that it is never going to be possible under the current rules to provide the quality professional advice that the regulator demands at a price the average person can realistically afford. With starting salaries for financial advisers and financial planners in the £40,000 to £60,000 range and even starting salaries for some paraplanning roles topping £30,000, providing financial advice with a human touch has never been so expensive.

As a result, professional financial advice has increasingly moved upmarket. A quick check of financial advisory websites reveals that many are looking for portfolio sizes of £150,000 and upwards as a starting point. Nothing wrong with that because financial advisers should sensibly focus on the most profitable client segments, but this means many millions will never be in the sights of financial advisers and will miss out.

The question is: what is the solution? Technology could offer an answer, however, we must accept that technology will have its limitations and a different regulatory approach is called for if regulation is not to hinder the growth of technology services.

There is no doubt that when consumers understand the long-term benefits of investing and saving they want to join in. What puts them off is finding out where to start and how to avoid the rogues. An FCA-approved formula or process for providing a limited advice, technology-based service could be just the answer. Here it is worth bearing in mind that many consumers may be unnerved by a technology-only service. One that places the burden of much of the data entering on consumers but offers limited human intervention when needed by a financial adviser could provide reassurance and encourage take-up.

One of the big problems for advisers in offering this service is the fear they have in getting involved in any limited advice service. They worry that even the most limited advice will leave them exposed to compensation claims and regulatory problems in the future because of the way the regulatory system works – and I have sympathy with that view.

To encourage the expansion of technology based or robo-adviser services, the FCA needs to accept that they would be beneficial to consumers, but fundamentally different to what had gone on before so would require a different regulatory approach, one that bridged the gap between execution-only and full advice.

Perhaps a cut-down robo service could be provided where limited liability only was accepted? This may sound naïve, but without this radical approach robo-advice may never become mainstream.

Perhaps a cut-down robo service could be provided where limited liability only was accepted?

Technology is advancing rapidly and I am increasingly impressed by the online tools, calculators and other financial help people can access these days. Consumers are becoming increasingly sophisticated in a world of contactless payments, smart financial apps and 24/7 availability.

These tools are nothing, however, without recommendations when it comes to investing, saving and pension planning. We have certainly cracked short-term financial needs when it comes to technology, but we have yet to tackle the perhaps more important long-term needs that millions have.

Here I am reminded of some comments from a leading fund supermarket a few years back. One of their senior executives said that consumers were generally happy to manage their own portfolio on a DIY basis, but when the size of the portfolio typically reached £100,000 or more they increasingly wanted professional help. There were a number of reasons for this, he said. One of them was the amount of time involved in managing a portfolio of this size and another was the fear factor in making a big investment mistake.

This may be a lesson for the future. Robo-advisers could get people started but as funds and portfolios grow, the human intervention from an adviser could be more readily available and with a larger fund perhaps more affordable, – a blended approach if you like. People may well find a robo-adviser just a temporary friend, albeit an important one.

Kevin O’Donnell is a financial writer and journalist

You said

Lee Tomkins in response to Ken Davy’s column about FSCS levies

This puts, in an extremely good way, the complete nonsense that the FoS/FSCS funding model is - as advisers we are getting fewer and fewer, and the number of advisers that have left, increases; it is unsustainable, unfair and stupid. Wake up before it is too late and there is no IFA industry left.