Robo-advice can be a “very good” complement to human financial advice, the Financial Conduct Authority has said, but it does not mean the end of normal advice “by a long way”.
Speaking on the latest Inside FCA podcast, deputy chief economist and head of research, economic data and behavioural science at the FCA, Karen Croxson outlined the research the regulator has been doing on robo-advice.
Croxson said the area offers huge potential and could go a long way in helping to extend the benefits of financial advice.
“Financial decisions are very important for all of us, but they're very hard decisions and often they're complex. We can all be quite challenged with financial literacy,” she said.
“We can all have our cognitive biases and limitations. So this is a difficult space for consumer decision making generally. It's really interesting to think about an opportunity like algorithmic advice, particularly as we go forward and some of the costs of that continue to fall.
“But really, in very basic terms, this is about harnessing data and technology to support people in their decision making.”
Croxson pointed to research the FCA has done in the area and said more work is needed to fully understand the nuances of the challenges and opportunities, but overall she believes robo-advice offers great potential for the sector.
“There are only so many human financial advisers in the world, and there are a lot of people out there needing to take financial decisions,” she said.
“So, this is not necessarily a complete replacement for that but many decisions are going unsupported in that sense, and this could be a relatively cheap, fast, maybe even 24/7 tool that could be available for consumers for some of their financial decision making.”
Despite this potential, FCA research has shown that consumers do not fully trust robo-advice and are generally sceptical of solutions that they know has been designed by an algorithm.
“A few years ago, we ran a few online experiments to look at consumer attitudes towards robo advice and investments,” Croxson said.
“How do you make sure that a tool like this really supports consumers? Well, including not just the average consumer, but also thinking about more complex cases or aspects of vulnerability and really making sure that the advice and recommendation would be appropriate.
“On the demand side, how much confidence would you have that consumers would really trust and adopt algorithmic advice? There is a bit of literature on something called algorithm aversion.
“On occasion, in some circumstances, people, all other things equal, seem a little bit unsure whether to trust advice when they know that it's been generated by an algorithm and a technology rather than, say, sitting down with a human adviser or a friend or a relative.”
Digital markets
Elsewhere, Croxson spoke about the work the FCA is doing in digital markets and noted that it is particularly interested in examining the gamification and some of the ‘sludge’ that is seen on online financial platforms.
One area the FCA is concerned about is the consumer journey and how firms nudge clients towards certain decisions.
Croxson gave the gamification of trading platforms as an example and said this is a trend that has led to negative outcomes for consumers.
“Our analysis raised some concerns that the consumers using these apps were exposed to quite high-risk investments in ways that might not lead them to very good outcomes,” she said.
“We found some evidence that some users exhibit behaviours that are similar in various ways to problem gambling, and we've published some of the insight from our research recently.
“Gamification and other digital design features could be used also to engage consumers positively and support them. So again, it requires a careful look and there is a need to be quite careful about jumping to conclusions.”
Coxson added: “Not all sludge or nudges are harmful. Sometimes the frictions can help. So, it's about nuanced behavioural science work, not necessarily all happening here inside the FCA, but I think this is the opportunity when you think about the future and really getting things right for consumers with journey design.”
jane.matthews@ft.com
