FCA review could be ‘missing ingredient’ for robo-advice

The head of product at Moneyfarm says the proposed reforms could prove to be the “missing ingredient” for a market that has been slow to come off the ground.

A number of digital advisers have launched in recent years but many, including Investec’s Click and Invest business and Moola, have since closed their doors after they buckled under financial pressure.

In a Q&A with FT Adviser In Focus, Godlonton outlines why the FCA’s proposals for targeted support and simplified advice could be the answer to the market’s woes and why they could be particularly attractive to building societies.

We would argue that the options presented in the review are symbiotic to automated/robo-advice and could potentially serve as the missing ingredient to enhance their adoption

FTA: What is your view of the FCA’s advice-guidance boundary review?

RG: We appreciate any development that facilitates easier and more affordable access to investment advice and guidance for consumers.

The proposed changes are likely to encourage companies to invest in services that provide a larger segment of consumers with the confidence needed to transition from saving to investing.

This is especially true for services that are currently too expensive to administer or pose untenable regulatory risks for companies.

The recognition of the potential for technology to scale guidance and advice is positive, striking a balance between addressing consumer needs and ensuring commercial viability for businesses.

FTA: What was missing in the proposals?

RG: The exclusion of automated/robo-advice due to its purported inability to attract a large customer base raises questions.

We would argue that the options presented in the review are symbiotic to automated/robo-advice and could potentially serve as the missing ingredient to enhance their adoption.

In our opinion, the proposals should consider how automated/robo-advice solutions can be augmented with support and simplified advice delivered by a human to help bridge the advice gap.

FTA: Which proposals do you consider most helpful for the UK market, which will be consigned to the dustbin?

RG: Although further clarification of the boundary is welcome, it may not significantly impact consumers with limited financial knowledge and experience.

Providing factual information alone only works for the confident delegator. Consumers with limited financial knowledge and experience tend to ask what they should do and companies might not be able to give them the answer they are looking for.

Targeted support will enable companies to go a step further than they do today by suggesting a specific product or course of action based on “people like you”.

Simplified advice also shows promise as it will allow companies to provide a personal recommendation to the consumer without the overhead and friction of a complete and thorough fact-finding process.

This also offers the most upside in terms of scalability as it can be codified in an algorithm and delivered at a low marginal incremental cost.

Enforcing an explicit cost for this option may be a limiting factor, particularly for vertically integrated companies that may want to offer the simplified advice for free and monetise on the products they offer as has been suggested for the targeted support proposal.

FTA: Will these reforms make it easier for digital companies like yourself to operate in the UK wealth management space and attract more diverse clients?

RG: Yes, the digital journey we offer today provides regulated advice. We ask a series of questions to understand our client’s attitude to risk, financial knowledge and experience, financial situation, time horizon and investment goal.

We then use our proprietary advice algorithm to provide personalised guidance as to which portfolio our client should invest in.

A retail bank or building society that is aware its client has excess cash in a savings account earning a negative real return would be well positioned to suggest that the client considers investing

However, our guidance is limited to recommending a suitable risk-adjusted return portfolio for our client to invest in. They still need to make several choices themselves, using the information and guidance we provide.

For example, they need to decide which product and investment wrappers are most suitable for their time horizon and investment goals.

The targeted support proposal could enable us to make a firm suggestion to our clients on which investment wrappers are best for them on a “people like you” basis.

The simplified advice proposal could enable us to extend the scope of our proprietary advice engine to also make a firm recommendation to our clients on how to split their investment across the various products and wrappers we offer.

FTA: What effect will the reforms in their current form have on the advice gap?

RG: If the proposals are implemented, we would expect to see more willingness and appetite from companies to cater for the needs of consumers that fall into the advice gap.

Without the threat of regulatory blowback or a commercially viable monetisation model, they will have the incentive to target the 4.5mn-plus, non-advised UK consumers with investible assets of £10,000 or more, held mostly or entirely in cash.

With the right level of support and advice, consumers who are interested in switching from saving (cash) to investing are more likely to cross the chasm. 

FTA: Which client demographic is likely to benefit the most?

RG: Consumers who are:

• comfortable with technology;
• aware of the difference between investing and saving (cash) and interested in switching but not sure where to start;
• have low/limited financial knowledge and experience.

This is assuming the proposed changes will leverage technology to be delivered at scale, otherwise they will not be commercially viable.

FTA: Who will be the main adopters of targeted support?

RG: Investment platforms, digital wealth managers, retail banks, building societies and financial account aggregators – all of whom are well positioned to segment their client base and make suggestions using the data they already hold on their clients.

For example, a retail bank or building society that is aware its client has excess cash in a savings account earning a negative real return would be well positioned to suggest that the client considers investing.

FTA: Being a disrupter yourself you have a good idea of what might come next in this market. What types of companies or services might we expect to see emerge on the back of the FCA’s reforms?

RG: We would expect companies like ours to be early adopters of the proposed changes, augmenting their existing proposition with targeted support or simplified advice to better serve their existing clients and expand their target market.

We would also expect to see growing interest from established retail banks (traditional and neobank) and building societies that have a predominantly cash/savings customer base and are looking to diversify their offering and revenue streams.

The proposed changes could give them the regulatory clarity they want to offer investment products and services.

carmen.reichman@ft.com