UK insurers and asset managers face a dilemma over automated advice, according to new research on the subject, between reputational risk and missing market opportunities.
Stuart Erskine, director at CG Financial Technology, and Paul Resnik, director at FinaMetrica, are soon to release a paper on the rapid development of so-called ‘robo-advice’ and shared their findings with FTAdviser.
Mr Resnik commented that so far, most algorithm-based advice models - be they completely automated, or ‘cyborg’, where a human component is required - have not paid much attention to best practice in terms of suitability.
“For this reason, I think many of the big players in the UK will be wary of putting their names on these things, as the next market shock could reveal some robo recommendations that don’t meet regulatory standards around suitability.”
He also argued that currently there’s not much money in this developing digital market, only potentially “career ending” reputational costs.
Mr Resnik stated: “The open legal liability that goes on forever in the UK means that no-one wants to be brave, which is different to the approach in the US, where big institutions are acting out of fear of losing market share.”
As previously reported, the US market has exploded this year with the entry of big players like Charles Schwab and Vanguard, along with BlackRock’s deal for FutureAdvisor.
So far, robo-advice in the UK has mostly been speculative, with LV taking a majority stake in automated advice firm Wealth Wizards to power its online retirement advice service and Just Retirement making tentative moves into ‘simplified advice’.
The robo report’s author Mr Erskine stated in its conclusion that outsourcing the technology and using white-label propositions are the lowest risk way for new entrants to consider entering the market.
He added that marketing, brand development and building a trusted emotional connection with customers will separate the winners from losers.
A recently published report from financial consultancy Capco agreed that larger, established firms should be able to leverage their existing visibility and piggy-back on the “heavy lifting” done by start-ups in this area.
“Established financial institutions can resource their robo-advice offer from their own capital base,” the research stated, adding their longevity also brings “deep experience of regulatory issues around financial advice and its compliance status”.
Andrew Arwas, UK head of wealth management and banking services at Capco, told FTAdviser that although the framework is still unclear and there’s a degree of concern in terms of reputational risk, this is the easiest route back into advice for many high street banks.
“It’s simply untenable that established brands are not visible within this space in the next 12 months,” he added, noting that more clarity on the regulatory backing for such innovation may be the key determinant of future market moves.
At a recent Financial Conduct Authority conference on the issue, the economic secretary to the Treasury Harriet Baldwin promised to develop a ‘sandbox’ that could be a “safer space” for firms to experiment with robo-advice ideas for consumers without the full burden of regulation.
The FinaMetrica report noted fear around potential comeback from complaints made to the Financial Ombudsman Service, something which led the authors to suggest that most models will at least initially be launched on a restricted, non-holistic basis and designed to address less complex advice needs.
It also concluded that many organisations may decide to stay on the execution-only side of the market, offering guidance only and thus not engage fully with the robo-adviser model. Following the US example, many will gain ground initially in the area of simplified advice in support of their main face-to-face model, targeting transactional and smaller clients who have less demanding investment needs.
This backs what Distribution Technology chief executive Ben Goss recently suggested, that while demand for online tools has increased, advisers will continue to serve the majority. “This doesn’t replace or compete with advisers, rather augments what they do,” he told FTAdviser.
peter.walker@ft.com
