Robo advice: the good, bad and the ugly

Its mission statement – to ‘radically improve access to financial advice to benefit all consumers’, is in large part, designed to tackle the advice gap triggered by the Retail Distribution Review. Its launch couldn’t have been more timely either.

The new Lifetime Isa announced during last month’s Budget, along with the reduction for capital gains tax and ability to use pension pots to fund advice, all underpin the need to help investors navigate the increasingly complex world of savings and investment.

A key recommendation by FAMR is the availability of automated, or ‘robo’ financial advice, already common in the United States as a solution that reduces the cost of advice for less well-off consumers.

Currently robo-advice in the UK is a relatively small market, with recent reports stating that robo-advisers cover less than £1bn of assets in Britain. You only have to look overseas to the US, however, to see its potential for growth.

There, unhampered by regulation, the top leading robo-adviser firms grew by 65 per cent in eight months, at the end of 2014, to $19bn (£13.18bn) AUM. This is 19 times the size of the UK market, despite a population of only five times as much.

there is a tendency among robo-advice developers to portray the number of potential customers who have fallen into this gap as being somehow limitles

The UK, in light of FAMR and its proposed regulatory changes, could follow suit. But will the robo-adviser really be able to offer the consumer a good solution at prices the customer is willing to pay and, crucially, what will all of this mean for advisers?

Turning a threat into an opportunity

The rise of robo-advice has been dubbed by some as the beginning of the end for traditional face-to-face advice. However, a closer look at how robo-advice is currently taking off in the UK reveals an opportunity for advisers who are also willing to consider incorporating automated services into their business model.

Major UK banks are so far planning some of the biggest launches into automated services, a move which is widely acknowledged to have been encouraged by FAMR’s recommendations around simplified advice.

This shift back into advice by banks has prompted valid concerns from the wider industry, given that it was not long ago that many were forced to exit the market.

Irrespective of any views on their re-entry into the advice market, one positive of this move by banks is that it should encourage more people to engage with their finances and therefore help plug at least part of the advice gap.