Could one of the latest US Robo advice offerings fly in the UK?
Following months of testing, Fidelity Investments has recently joined other notable fund management firms, such as Vanguard and Charles Schwab, by launching its own robo advice solution, “Fidelity Go”.
Primarily aimed at younger investors (aged 25 to 45) without complex financial needs, Fidelity Go recommends investment funds, based on an investor’s answers to a series of basic financial questions. However, unlike many other robo advisers, human investment managers will be responsible for the ongoing management and monitoring of these portfolios, rather than relying on computer algorithms.
Nevertheless, given the strict FCA requirements over suitability of investments, how would Fidelity Go fair in the UK?
In order to begin investing with Fidelity Go, investors must answer at least 7 questions covering their investment goals, current financial situation and risk tolerance. An investment strategy is then suggested by the Fidelity Go’s investment team, from one of seven portfolios consisting primarily of index mutual funds and ETFs, based on the investor’s needs and preferences. Investors can then either accept the recommendation or choose to answer further supplementary questions in order to refine their investment strategy.
The additional questions include:
- What would you do during a major market decline? Imagine you hold some stock or stock mutual funds. In the future the stock market declined significantly and your investment lost value in line with the market decline. How much would you sell?
- Sell a little (less than 25%)
- Sell some (26%-50%)
- Sell half or more (51% to 75%)
- Sell most or all (76%-100%)
- Do you have an emergency fund? If so, how long do you think it would last if you needed it?
- What's an emergency fund?
- No emergency fund
- Fewer than 3 months
- 3-6 months
- More than 6 months
- How much of your net monthly income is used to pay for essential expenses?
- Less than 25%
- More than 100%
- What is the likelihood that your household will need more than 25% of your total managed account assets at Fidelity in the next five years for a major unanticipated expense (e.g. unexpected medical bills)?
- Very likely
- Somewhat likely
- Not Likely
- How would you describe your household's financial situation? When you answer this, think about your job security, the types of benefits you receive at work, how much you spend, and any savings you have.
- Not secure
- Somewhat secure
In order to make use of Fidelity’s new robo advice solution, investors will need a minimum investment of $5,000 and will be subject to fees of 0.35% or 0.40% of assets under management depending on the type of account they choose to open.
Ongoing Management and Monitoring
Unlike other robo advice solutions that tend to use computer algorithms to allocate investments without the input of human advisers, Fidelity Go uses a team of financial professionals who make investment suggestions to their customers. Any money placed by investors in Fidelity Go portfolios will be invested, monitored and managed (including the rebalancing of portfolios) by Geode Capital Management, an unaffiliated registered investment adviser that has served as the sub-adviser for certain Fidelity products since 2003.
Access and Support
In an effort to appeal to younger, digital savvy investors, Fidelity Go will allow customers to access their money via computer, tablet and smartphone. Investors will therefore be able to deposit and withdraw funds, monitor the progress of their portfolios and receive updates and alerts using these devices.
In addition, investors will be able to ask Fidelity Go customer representatives for basic financial advice. Those looking for additional in-depth financial help are likely to be referred to other advisory services offered by Fidelity.
Although advisers are available to answer customers’ investment questions, Fidelity Go is primarily a digital service. As such, investment strategy recommendations are made based on an investor’s responses to a series of on-line questions covering the year of birth, household income, the reason for investing, the investment amount, term of investment and their risk tolerance.
With regard to the risk suitability assessment, Fidelity Go customers can choose from different alternatives as to which level of investment risk they feel comfortable with taking, ranging from “1 - Less Risk” to “10 - More Risk”. There is also an attempt to ascertain an investor’s capacity for loss and affordability - both key requirements for suitability. However, there remains a distinct lack of a comprehensive risk profiling questionnaire and the capacity for loss and affordability questions are rather limited and are only available as additional questions - they do not form part of the basic questionnaire and are not required for Fidelity Go to propose a suggested investment strategy. As a result, some investors may not answer these vital questions and, therefore, will not obtain an appropriate investment recommendation. As a result, Fidelity Go’s robo advice solution would fail to comply with the FCA’s suitability requirements.