The FCA has concerns over the growing popularity of robo-advice
Earlier this year, the Financial Conduct Authority made some damning comments about the increasing use of robo-advisers across the financial advice industry. The tools have attracted a growing following among those seeking low-cost financial advice, and when they first started to arrive on the scene, the FCA welcomed them with open arms, even setting up a dedicated advice unit for developers.
However, a recent review raised concerns that the automated systems were not providing adequate levels of financial planning help and were failing to take into account critical risk factors when offering advice to clients. Just what can we learn from this, and how will the FCA’s comments affect the way both consumers and those within the financial advice sector use AI tools in the months and years to come?
The age of the robots
The first robo-adviser actually arrived on the scene way back in 2008, but was not seen as any great innovation. It was simply a refinement on the portfolio allocation tools that the average financial adviser had been using for years, and like any technological innovation, was seen as a way for an adviser to do their job quicker and more efficiently.
The difference, however, was that this new breed of robo-adviser was not just a tool for those in the industry. It was also made available to investors, allowing them effectively to “cut out the middle man” and get information from the same sources used by the professionals, but at a far cheaper rate than sitting down with a human financial advisor, face to face.
The robo-advisers usually charge an annual flat rate somewhere between 0.2 percent and 0.5 percent of the overall investment portfolio. For a relatively small-scale client looking to invest, say, £100,000 or less, and comparing financial advice charges, you can see why this is such a compelling option.
What are the downsides for investors
Place yourself in the shoes of the average financial advice client with investments valued at a five-figure or low six-figure sum. These are the sorts of people who will be drawn to the robo-advisers from a cost perspective, but they are also the ones who are most in need of that human touch. Here you have the young newly married couple juggling outstanding student debt on the one hand, some savings on the other, and wondering if now is the time to stop renting and to buy a new home.
Or how about financial assistance for pensioners? Consider the retiree thinking about going back into part-time work and seeking objective advice on how best to use existing income from multiple pension streams, and to manage their money with optimum tax efficiency.
These might sound like relatively everyday questions, and that is because they are all in a day’s work for a professional financial adviser. Similarly, an experienced investor, with a multimillion-pound portfolio who has seen and done it all is likely to see any flaws in the advice offered by the technology. The irony of it is, however, that these “big time” investors are far less likely to relinquish their human support structure, and it is the small scale or amateur investors that are placed at the greatest risk.
What were the FCA findings
Following its review, the FCA identified a number of shortcomings, both relating to the advice itself and the way the whole service is administered. The latter category is, in many ways, the easier to address. Problems included services that did not provide clear disclosures relating to fees or the exact nature of the advice being offered in terms of whether it was advised or non-advised and discretionary or non-discretionary.
This ambiguity extended to the way in which they compared their prices against other supposedly like-for-like sources of financial guidance.
Perhaps even more worrying, though, is the fact that suitability assessments were found to be inadequate. Many of the robo-advisers pay little attention to an investor’s financial experience, underlying objectives or capacity for loss.
A key flaw is that many robo-advisers rely on the investor to “self declare” any specific vulnerabilities that might mean he or she needs special treatment or additional risk management measures. If they fail to do so, there is no safety net in the way that exists if the client is sitting across the desk eye to eye with a human adviser.
A work in progress
It will come as little surprise to hear that the developers behind the technology have downplayed the comments from the FCA. Al Rush is the founder of the Fiver a Day robo-advice firm. In an interview with the Financial Times, he acknowledged that his robo-advisers would not be able to identify vulnerable clients as effectively as a human could. He said the firm is “looking at improving it and expanding the scope of the questions” in order to address this issue.
Rush’s comments might sound disingenuous, but he at least responded to the findings, which is more than representatives from other major providers, such as Moneyfarm or Scalable Capital chose to do.
What does the future hold?
To some extent, the developers are right. Robo-advice technology is in its infancy, and as the AI behind it gets more sophisticated, so too will the advice being offered.
The truth is that the human side of financial advice is always going to be needed. People are complex creatures, and when there are personalities, aspirations and emotions involved, the technology is never going to be able to replicate human intuition.
At the same time, there is no sense in trying to stop the tide. The most successful financial advisers in this new era will be the ones that can leverage the technology and use it to their advantage. Work alongside the tech to make yourself available out of hours and via a smartphone app.
That way, the client has all the convenience of technology, yet can still access the human advice that only you can give when they need it most.