OpinionJan 19 2016

Robo-advice is not advice at all

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Robo-advice is not advice at all
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If we believe all that we hear, so-called robo-advice will soon become the most important element in the delivery of financial services. I have some strong views on this.

Wikipedia seems to have summed up the definition of robo-advice quite well: “Robo-advisers are a class of financial adviser that provides portfolio management online with minimal human intervention”.

Is it advice?

No. And this is where I have a major problem with the term, it is clearly not advice. At the very most, and only in some cases, it is guidance, but even the providers of such services are extremely definitive in confirming that it is not advice. It is automation.

At the most, and only in some cases, it is guidance, but even providers of such services are definitive in confirming that it is not advice. It is automation. Paul Stanfield

Is it new?

No. Hargreaves Lansdown, as just one example, created a fully discounted online service for UK clients, making their own investment decisions way back in 1996, and even launched a fully online, non-advised pension product as far back as 12 years ago.

It isn’t new but the rate of progress and development in this area arguably is.

Should we believe the headlines?

No. Well, at least not always. One article referred to US investor appetite for such services as “vast” – and then highlighted the fact that the 10 major US companies in this area had total combined assets of only $6bn. That is hardly “vast” - many UK standalone platforms dwarf that total figure alone.

Having said that, increased automation is on its way, of that there is no doubt in my mind. We simply need to take a reasoned view as to the degree and the manner in which it is likely to affect our industry.

Can we learn from the US?

Yes. While the US is often quoted as an example of how full automation will ‘take over’, the market there has actually moved in a different direction.

The models which are expanding in the US are half-and-half; they have an automated front-end, where the client pretty much self-serves in terms of putting in all their details, and then speaks to an adviser on the phone or via Skype for the advice part.

It seems clear to me that semi-automation is more likely to be the shape of the future, certainly in the advice sphere.

What do regulators think?

The UK’s Financial Conduct Authority has laid the groundwork for firms to come to market with automated models, not least via ‘Project Innovate’ in 2014 and also under the remit of the recently announced Financial Advice Market Review.

The Australian Securities and Investments Commission (ASIC), has confirmed that it is engaging with the industry on these new developments and how they fit within the regulatory framework.

In addition, the European Union super regulators (ESAs) have just launched a consultation with regards to automation within financial services.

What do consumers want?

This is very well summed up, I feel, in the recent Cerulli Associates report: ‘Addressing Millennials, the Mass Market, and Robo-Advice’.

It stated that: “While some consumers may feel comfortable receiving all of their advice digitally, never interacting with a person, this is a small segment of the overall population.

“Most consumers want to know that they can reach out to a person to solve a problem with their finances should the need arise.”

How should advisers respond or adapt?

The Cerulli report mentioned above went on to say: “In addition, we anticipate that most, if not all, retail direct firms will have a digital advice offering within the next three years, and traditional advisers will also launch digital offerings for lower-balance investor accounts.”

Tools which allow firms to automate certain parts of the advice process are being tipped to take off in the UK (and, no doubt elsewhere as well).

The online system Advicefront, for example, invites clients to input their basic information and goals as well as fill out an appetite for risk survey.

The adviser delivers recommendations, either face-to-face or remotely, while Advicefront also offers tools such as custom model portfolios, automatic portfolio rebalancing and automated annual reviews.

Threat or opportunity?

While online services are often perceived as a threat to the advice market, tools which can automate part of the process turn the trend into an opportunity.

It is also important to realise that not all consumers need or have a requirement for advice on every financial decision.

It is therefore of paramount importance to know your market and understand how best to develop and service it. In the future, in my opinion, most clients won’t be either online or face-to-face, they will be both.

Conclusions

It is not advice, nor is it new. Be wary of headlines but be aware that increased automation is going to happen.

Remember that it does not work for most financial planning needs, only for simple financial aims and requirements.

Across Europe, advisers simply need to ensure that they provide advice and do not simply sell a product. A computer can do that.

Paul Stanfield is chief executive of the Federation of European IFAs