Some years ago, financial regulators noted that many of the instances of bad advice that they had seen had been a result of the pursuit of commission payments. No surprises there.
Responding to public outrage, the regulators decided that banning product providers from paying commission would ‘sort out the problem’. Unfortunately this produced an unintended consequence: a huge ‘advice gap’ appeared as many financial advisors decided that, now their initial and trailing commission revenue streams were absent, it was no longer worth dealing with clients with less than £100,000.
According to the Association of Professional Financial Advisers, 43% of UK advisors have turned away potential clients in the last year because the provision of financial advice to those people could not be done profitably for the advisor. The FCA reports that two-thirds of financial products sold in 2014/15 were "non-advised", and that 34% of people who had bought a financial product without advice later regretted the decision.
Filling the Gap
The FCA decided that mass market automated advice models i.e. robo-advisors, which provide automated, algorithm-based portfolio management advice, looked like the best solution, subject to some changes in the law. Digital robo-advice will offer a lower-cost way of providing investment expertise to thousands of people with small savings pots who have been priced out of the advice market in the past few years. Customers will be able to go online and answer a number of questions about their financial circumstances, and then receive recommendations about investment.
In a hybrid version of this, advisers will be able to use the robo in conjunction with the client. This is the model being proposed by the UK’s biggest banks. They are planning to launch robo-advisers in a move to provide investment advice with a digital twist to thousands of consumers, only a few years after they were forced out of the market for potential mis-selling. This hybrid robo-advice is a way for banks to deliver investment help more cheaply without training hundreds of staff. It should also attract more customers who are increasingly turning to online and mobile devices for banking. In theory, the client would work with the robo-adviser, which would suggest how much money to invest into certain funds. The bank could then transact on a customer’s behalf in return for a fee. A possible downside is that many of the banks will only be recommending their own products, rather than offering a selection from across the market.
The Way Forward
According to Money Mogul, the general consensus is that automated services will not replace human advisors, even in the long term, but advisory and investment firms need to actively consider the technology as tech-savvy 30-40 year olds begin to gain investible wealth in the coming years. In the short term, the technology will be beneficial for client segregation, reserving the more expensive services of human financial advisors for high net worth investors and large institutional clients whilst also offering a service for smaller, younger investors – attracting a more diverse client base.