FCA: Willingness to pay for robo-advice outweighs benefits

In a paper published today (August 30), the City watchdog said 22.8 per cent of 3,423 adults it surveyed ended up receiving paid robo-advice recommendations, but the average willingness to pay within this group was 60.1 per cent. 

“This result confirms that, on average, users who were asked to provide a value for the robo-advising tool in our setting valued it more than the monetary benefits that the robo-adviser actually provided,” the regulator explained.

These monetary benefits included savings in interest and fees.

Consumers’ high valuation of the benefits of robo-advice for debt management and the simplicity of its execution are at odds with the lack of real-world implementations.The FCA

The FCA said the results might point to consumers’ “excessively pessimistic” attitude about their performance in loan repayment tasks when unassisted.

Or,  it said, the results could point to the fact that consumers value the non-monetary benefits of robo-advice, such as being able to avoid the “cognitive and psychological costs” of making choices about their wealth.

The data was gathered two years ago by online platform Qualtrics but published for the first time today.

Of those not willing to use the tool, 22 per cent indicated that they found the algorithm-driven advice too expensive, 54 per cent claimed they wanted to make their own decisions, and 21 per cent said they could make better decisions than the algorithm.

Conversely, the regulator found free robo-advice for loan repayments levelled the playing field, making those with lower financial literacy “better off”.

This was because financially literate consumers were more likely to override the robo-advice, or simply use it to compare with their own decisions. 

These findings led to the observation that higher financial literacy decreased willingness to pay for robo-advice, whereas higher levels of risk aversion increased it.

One thing the FCA did label as “concerning”, however, was that regardless of financial literacy, a similar amount of consumers across all levels held the conviction that they could beat the algorithm.

Some 26 per cent of those who chose not to take robo-advice among the least financially literate argued they could make better choices unassisted, compared with 31 per cent of the most financially literate.

But the regulator was quick to add the caveat: “The concern that participants will override robo-advice recommendations, especially the most vulnerable households, appears to be minimal when robo-advising is provided for free.”

The main reason for taking robo-advice on loan repayments among lower literacy levels came down to consumers wanting to delegate financial choices, while those with more financial literacy mainly took it out of curiosity to compare their solutions with those the algorithm would propose.

The study did not find any evidence of incremental learning from consumer exposure to robo-advice. 

“Consumers’ high valuation of the benefits of robo-advice for debt management and the simplicity of its execution are at odds with the lack of real-world implementations,” the study concluded.

“Market-based solutions are inherently limited because lenders’ profits are a non-monotonic function of borrowers’ debt. 

“Consequently, the supply of robo-advice tools focused on loan repayment might require government intervention or entry by private providers unaffiliated with lenders.”

ruby.hinchliffe@ft.com