In response to the ‘advice gap’, defined as those who cannot or will not pay for full regulated advice, plus a failure to increase the number of people saving or investing, the UK Treasury and the Financial Conduct Authority are focused on automated ‘robo-advice’ as the silver bullet to resolve these issues.
Allegedly, the high cost of advice is blamed by many for the advice gap, with the FCA finding that more than 85 per cent of investors were not willing to pay more than £200 for online advice. IFAs charge £150 an hour on average, according to www.unbiased.co.uk, which many consumers regard as too expensive for their needs. On the adviser side, if a client has less than £100,000 to invest, many IFAs do not want to compete for their business.
Given these restraints it appears to make sense to introduce a form of advice that does not use the ‘expensive’ time of advisers, and is able to provide solutions at a more affordable level. Open any investment or advisory publication, and you will see new Fintech or Robo Adviser launches. They explain why the march of the machines will end financial advice and investing as we know it; as well as closing the advice gap by offering affordable advice to the mass market. As Dan Egan, director of investing at US robo-advice firm Betterment, says: “If you are a young person setting out and you only have $2k-$10k to your name, no adviser will talk to you – but we are happy to.”
However, while there is no doubt that technology will drive the evolution of the investment and advice industry, the authors of a new report by SCM Direct (tellingly entitled ‘Fintech Folly’) take the view that caution needs to be exercised. In SCM Direct’s view there is a fundamental flaw with the tag ‘robo-advice’ as it implies these new firms are offering the same range of advice as a face-to-face adviser. This is not the case as most robo-advice models are simply offering direct to consumer investment solutions. There is a strong chance, given the data available so far, that many of the robo-advice companies are going to market with a financially unviable product, and may well go bankrupt before acquiring the scale they need to be profitable. Merely breaking even will take nearly 11 years, the report estimates. Many will go under before they reach this stage.
Not unsurprisingly, it appears that robo-advice companies are heavily targeting tech-savvy millennials, whose assets make up a remarkably small proportion of the market, (just 5% of the overall investment market) meaning robo businesses’ chances of making a profit become very slim. Of course the millennials may well have more to invest later in life, but by that life stage many of the current robo-advisers may have gone bust.
Finally, the report argues that an online risk questionnaire cannot take into account clients’ full financial picture, nor assess other significant unconscious information (expressions, body language) they might give and is therefore unable to assess their best interests.
From Uber to iPhones, people are turning to technology to make life easier. Why shouldn’t it play a role in bridging the advice gap, especially for people with smaller pension pots?
At a roundtable hosted by consultancy Barnett Waddingham, experts questioned whether a truly operational robo-advice service, which works not just in the savings phase but also at the point of and during retirement, exists anywhere in the world.
They cited several related concerns with the robo-advice model. The first is that robo-advice may not adequately address the needs of retirees in the complex new world of pension freedoms.
“Robo-advice on accumulation is far more straightforward, but becomes way too complex at the point of retirement and in decumulation,” says Matthew Webb, head of international benefits at Thompson Reuters.
The Rational Approach?
B&CE has been providing workplace pensions to employers with transient, low-to-moderate earning workforces, both large and small. In November 2011 B&CE launched The People’s Pension, ‘a flexible and portable workplace pension, designed for people, not profit’, as an additional product to help employers comply with their automatic enrolment duties.
Recognising the need for advice and the restraints of traditional advice routes, The People’s Pension signposts the government’s guidance service, Pension Wise, at retirement, offers a robo-advice guidance portal via LV=, and offers regulated advice at £49 a session.
Darren Philp, the company’s director of policy and market engagement, says: “In some cases, it is good for people to get face-to-face advice. But there is a general mistrust of advisers and a perception that they are expensive.” He says robo-advice can make a difference, however, as part of a wider member journey where people move in and out.
“I don’t think we will ever be in a world where robo-advice will be the be-all and end-all,” says Philp. “If it gets complex, you get human intervention.”