Fears are mounting that the rapid rise of robo-advice has outpaced the regulator, risking unsuitable investment recommendations that advisers will ultimately have to pay for.
The FCA has committed to launching a new robo-advice unit as part of the Financial Advice Market Review. The unit will be an extension of its ongoing Project Innovate to help firms launch new technology-backed services. According to Tracey McDermott, acting head of the FCA:
“The advice unit will support the development of automated advice tools that can help provide low cost, high quality advice to mass-market consumers on investments, pensions and protection. However we don’t want to wait 12 months before we can make progress. That’s why I can announce now that the Advice Unit will be open for business from May. The Advice Unit will support the development of automated advice tools that can help provide low cost, high quality advice to mass-market consumers on investments, pensions and protection. It will be open to firms of all sizes, linking up with our work on Project Innovate. We will initially be giving eligible firms feedback on how their advice models can meet regulatory requirements and expectations.”
Understanding the risks
Nutmeg, a company offering an investment management service, are operating in the advice market through a mix of online, telephone and face-to-face services. They have previously warned the FCA has been “too open-minded” on robo services. Policy executive Frankie Evans said: “Is there going to be the right statutory protections for the consumer on robo-advice as it stands? We’re not completely confident on that. It would be useful if the FCA could give more information about how it’s going to protect the consumer from lousy or badly updated or uninformed systems. Because if you have one mistake in the system, you could be advising 200 people in the space of five hours.”
Mark Polson of The Lang Cat financial services consultancy agrees that the mechanics of offering an automated service do mean flawed systems can rapidly affect more customers. But, he says: “Most of what these guys are offering is very simple and very constrained. It seems to me the level of jeopardy in terms of telling someone to do their ISA before they start doing other savings doesn’t seem too dangerous to me. The jeopardy is more around whether there is something in the risk-profiling process that moves people into the wrong portfolios. But a lot of these systems have got those bases covered off. They are not completely stupid – these systems have been set up, at least in part, by people who already give advice.”
Polson argues robo-advice does not necessarily mean execution-only, with some advisers taking up white-labelled offerings from the likes of Centralised Investment Proposition (CIP) specialist Parmenion, to complement their current advice models.
Al Rush, founder of Fiver a Day (‘Quick, highly affordable, simple, online financial advice’) says his clients use a front-end robo-advice service, with Rush then manually verifying outputs. In total, Rush estimates he approves three-quarters of applications. For the remainder he goes back to the client to discuss whether a client has additional savings, with just one in five of those meriting further investigation before being approved.
He says: “I have set the threshold quite high because whatever people say about robo-advice, the bottom line is it’s still my name on the business, and I don’t want any nasty surprises.”