The march of the robo-advisers: can you hear alarm bells ringing?
‘Robo-advice’ has continued to gain traction in the UK since it became harder for a portion of the population to gain access to financial advice.
The so-called ‘advice gap’ was exacerbated by the Retail Distribution Review (RDR), which came into force in 2013 and changed the way that some firms deliver financial advice. This significant piece of legislation caused banks to withdraw from the advice market, making it harder for many to gain access to financial advice. This wasn’t necessarily a bad thing due to the inherent conflicts of interest within these organisations. However, when a number of advisers upped their minimum investment levels in reaction to the RDR, it became even more difficult for those with less money to receive advice on their financial affairs.
Since early movers Nutmeg and Money on Toast launched in 2012, the fledgling robo-advice market has continued to grow – conveniently going some way towards plugging the advice gap. The term ‘robo-advice’ describes a number of different business models. Some firms deliver investment management direct to the consumer online, while others provide automated financial advice. These services are delivered digitally, marketed as lower cost and involve little or no human interaction. They are also typically powered by computer models, known as algorithms.
“Since early movers Nutmeg and Money on Toast launched in 2012, the fledgling robo-advice market has continued to grow”
The sector has been awash with launches: from big wealth managers to complete newcomers. Some of these companies have experience in financial services, while others are simply technology companies that believe in the strength of the processes they have developed. Notably, a number of the large banks are plotting a return to the advice market via robo propositions.
The good news is that the financial watchdog, the Financial Conduct Authority (FCA), is making efforts to keep up with the growing trend. It recently launched a ‘regulatory sandbox’ where firms looking to enter the space can test their products and services. The FCA has also created a dedicated robo-advice unit to help companies that are planning to develop fully or partially automated services.
Nevertheless, regulating this new and growing space represents a challenge. Historically the FCA has regulated intermediaries, so what happens when you remove the intermediary and the client ultimately takes greater responsibility for the advice provided?
“Regulating this new and growing space represents a challenge”
Time will well, but at this point in time one can understand why the cynics are warning that robo-advice could spark the next mis-selling scandal. This is because a number of question marks remain. Firstly, the regulator still needs to clarify its definitions of ‘advice’ and ‘guidance’. Second, as many of the services involve the client filling out a risk questionnaire, much relies on how these important questions are asked. Linked to this, the advice or portfolio recommendation provided can only be as good as the quality of data that is entered by the end-user, creating scope for mistakes.
And finally, the delivery of automated financial advice has its drawbacks. How can a robo-adviser fully take into account an individual’s circumstances and tax situation? A ‘one-size-fits all’ approach doesn’t tend to work when it comes to the delivery of financial advice.
On the positive side, anything that makes financial advice more accessible to the masses and can ultimately bring charges down must be welcomed. Likewise, it is good to see that robo-advisers have attracted the attentions of generation Y and the millennials, encouraging them to engage with their finances.
We are clearly at the beginning of a long journey, as robo-advice develops and establishes its place in the market. There will, no doubt, be bumps along the way.
Let’s just hope that sandbox succeeds in weeding out any potential problems.
Danielle Levy, freelance journalist
Danielle is a freelance journalist and editor, with 10 years’ experience in financial journalism. She has written for a number of publications, including The Telegraph, Daily Mail and The Independent. She was formerly deputy editor at Citywire Wealth Manager.
The march of the robo-advisers: can you hear alarm bells ringing? is a guest post and the views here do not necessarily concur with those of Investment Quorum. In fact, it is very often the case that we may be largely in disagreement but we respect the opinions of others and value their contribution to the wealth management debate. Guest posts may appeal more to some than others and may often have an industry, stock market or sector knowledge expectation.
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