PensionsOct 23 2015

Dawn of the robo-adviser

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Dawn of the robo-adviser

It is not the title of the latest blockbuster movie set to hit the big screens – nor is it the final film in the Robocop series which you missed out on 10 years ago. It may sound retro – but like it or not the ‘robo-adviser’ is the future of pensions. And very much like the plotline of a futuristic film, our hero – the retirement planner – is worried he is going to be replaced by a machine. Can our adviser resist what seems a certain fate, or will he triumph against all the odds?

The lines of the battleground are being drawn up right now. Providers are fighting it out with the regulator over the precise rules of engagement. The main dispute is this simple question: when does guidance become advice? While this is a conundrum for all advisers, in retirement advice it is particularly an issue as online guidance is commonplace.

In the eyes of the Financial Conduct Authority (FCA) the answer is never or always, depending on your point of view. That is because guidance does not exist, nor does ‘light-touch’ or ‘simplified’ advice; it’s either advice or it isn’t in the FCA handbook. This long stretch of grey area has for many years mystified pension providers and pension fund trustees who necessarily inhabit the no-man’s land that sits just outside the boundaries of officially regulated advice.

In an occupational defined contribution pension scheme, for instance, to what extent can the trustees provide helpful guidance to their members about key issues such as how to understand risk or what level of contributions is appropriate?

General rule

The generally accepted answer has been; as long as the information is generic, and not client specific, there is no advice being given. But that rule of thumb has been tested more recently by online, automated retirement planning tools, largely managed by insurers, which allow a retail client to input variables, such as target retirement income, current salary and other personal details, plus a few basic assumptions about investment growth, in order to generate a report.

This report makes projections about the level of retirement income that can be expected based on the information the individual has submitted. But while the information is clearly personalised, it is not making any investment or product recommendations and is full of caveats, labelling the information as examples only.

Extremely useful though an individual may find this, the pension provider will argue that no advice is being given – the system is simply crunching numbers that the individual has supplied. The next step, which the website encourages, is to speak with a retirement planner.

In this way pension provider websites have been pushing the boundaries of what guidance they can give to potential clients without crossing the threshold of advice. The get-out clause at the end of the automated process is that, to actually buy something, the customer has to talk with a proper adviser. That is the final step that is now being challenged by a new breed of ‘robo-advice’ propositions which allow the customer to actually buy a pension plan at the end of it. In the US, it is already big business

Taking lunch....

The market makes sense. It is quick and easy to do. It is cheap. You can set up your pension in your lunchbreak – and you can check up on it in your lunchbreak too. For the new generation of tech-savvy savers it is a much more comfortable and intuitive process than actually talking to someone face-to-face. But it is yet to take off in the UK.

Currently, there are a handful of providers, many of whom are offering expensive or incomplete services. Although self-direct investors now have many options to set up and manage their own execution-only personal pensions online, there are remarkably few options for robo-retirement planning.

And those that do exist fail to tackle the decumulation phase. As it stands, customers are expected to take advice at retirement in order to decide how to manage the draw-down phase or annuity purchase. But the technology clearly exists on some provider websites that would, if properly configured and enabled, allow customers to crystalise their pot at the touch of a button and manage their income entirely online. So why is the UK behind the times? Because the world is waiting for the FCA to set the rules before battle can commence.

The spark which caused robo-advice to take-off in the US was clarity from the regulator over what is, and isn’t allowed. Although the FCA has consulted and accepted that its role is to define the line between advice and guidance, it has yet to do so in any meaningful way. As a result, would-be robo-advice providers have been tentative, wary of being accused of providing regulated advice without the necessary permissions or uncomfortable with investing in significant up-front costs only to find out that their proposition falls foul of rules the FCA is yet to publish.

With the weight of publicity and industry demands now building pressure to near boiling point, the FCA will have to act soon. And if the rules it publishes are clear enough, the market could erupt almost instantly. Perhaps this is what the government is banking on. Having finally acknowledged in recent years the well-known demographic time bomb that is the pensions savings gap, ministers have attempted to do something about it through auto-enrolment.

But even those who dwell within the ivory towers of Westminster and Caxton House are now accepting that for the majority it is not enough. Whether through the workplace or through personal retirement planning, more needs to be saved. And if easily accessible online portals finally break the deadlock it will be welcomed with open arms.

So where does that leave retirement planners who are set to be neatly side-stepped by the new industry – a bleak impoverished future, put out of business by machines? Happily, this dystopic prophecy is not inevitable. In fact, the power of robo-advice is that it could allow planners to build scale in their own businesses. Today, every client needs a file brimming with forms, notes, recordings of conversations and advice generated by face-to-face meetings and the lengthy documenting of them. What if much of this can be automated online – with the finer details done by telephone or Skype?

Get online

The beauty of online forms is that it is up to the client to supply the boring but vital information from the comfort of their own home. No more turning up to appointments with a document missing. Risk assessments and cash-flow planning – they can be done online too, powered by the same spreadsheets that advisers might manually input during or after a meeting.

And all the outputs are automatically saved and stored. For clients with relatively straightforward needs, this would surely be a better way for advisers to help them? And geography becomes irrelevant – this way your advisory firm can handle clients anywhere in the country.

Of course setting up a robo service needs solid technology; the biggest firms with the biggest budgets stand the best chance in the forthcoming war. But there is nothing to stop retirement advisers adopting some of the web-based functionality of the robo to streamline their own service to existing clients, and reach out to new ones. Many clients will still need a touch point to discuss more complex issues – and advisers used to talking to clients will be much better placed to service them than the distant help-desks of massive firms.

The danger for retirement planners who fail to adapt to a post-robo world is that they are left behind by the new technology, and lose clients to rivals who have been better at incorporating the best of robo-tech within their long-standing traditional advice proposition. Building this tech need not be complex. Anything you can make on an Excel spreadsheet can be built into a webpage – you just need to invest the time in working out how, or hiring tech savvy staff who already know how to manage websites.

The tools available to website developers are surprisingly easy to grapple with – it is never as complex as the so-called IT experts suggest. For retirement planning IFAs the issue is even more acute than investment-only advisers, particularly where clients’ needs or risk profiles are likely to evolve over the years. Combining customer-friendly tech with expert human support is likely to be a winning combination.

The new dawn of the robo-adviser is coming – ignore it at your peril.

Bob Campion is head of institutional business at Charles Stanley Pan Asset Capital Management