Could US style Robo Advice fly in the UK?
Robo advice has been around in the US for many years, using automation to select investments that meet the consumer’s risk appetite and investment goals. But, given strict FCA regulations in the UK on the suitability of investments, including capacity for loss, would US style robo advice work here?
To find out, in this series of blogs, we take a look at what the most popular US robos offer and the processes they undertake. Starting on a positive note, Personal Capital operates a model that could work in the UK from a regulatory perspective.
According to its website, over 1,000,000 people currently use Personal Capital to track in excess of $226 billion. The numbers are boosted because this tracking service is a free offer. Personal Capital manages assets of just over $2bn on which it charges 0.89% a year on funds up to $1m.
However, unlike many other US robo advice offerings, Personal Capital is a hybrid online investment adviser. As well as providing automated investing and financial planning tools, Personal Capital also offers investors, with a minimum of $100,000, the opportunity to consult with a Registered Investment Advisor (RIA) for personal financial planning advice together with a portfolio management service.
How does Personal Capital work?
After connecting various financial accounts, including mortgage, credit cards, bank accounts and investment accounts, Personal Capital’s free service produces a summary of the consumer’s current situation and offers basic investment guidance including a retirement planner and an investment checkup tool.
Retirement Planner and Investment Checkup
Personal Capital’s Retirement Planner tool enables consumers to ascertain where they stand relative to their retirement goals. The tool uses financial accounts that the consumer has already linked to Personal Capital to help assess how prepared they are for retirement, based on their chosen retirement date. The tool can further evaluate whether the individual can afford large expenses such as buying a new home or planning for school or university and still meet their retirement goals.
Personal Capital’s Investment Checkup feature is designed to give high-level recommendations on the consumer’s investment asset allocation. This can also help investors identify small portfolio adjustments that could, potentially, lead to better investment returns.
By inputting a basic risk profile and a retirement date together with predicted income, the tool produces a graph highlighting the recommended portfolio for the consumer.
However, no risk questionnaire is included in the tool and it is solely down to the consumer to choose from 5 different alternatives, ranging from “Highest Safety” to “Highest Growth”, as to which type of investor they think they are. In addition, no supplementary questions are raised in order to ascertain the consumer’s capacity for loss. Personal Capital also uses predetermined asset allocation models which do not allow consumers to stray from the recommended allocations.
The FCA has in fact made it very clear that regulatory requirements for digitally enabled advice solutions are exactly the same as for financial advice which is delivered by more traditional methods. This means that, unlike in the US, UK robo advice propositions giving personal recommendations will be obliged to ask investors lots of questions and then thoroughly analyse their responses in order to ensure the suitability of recommendations made.
Personal Capital provides a comprehensive service, bringing together all of an investor’s financial accounts in one location and allowing them to better understand their overall asset allocation. The free service does not use a risk questionnaire and so can avoid giving a personal recommendation. The “paid for” financial planning service and portfolio management is provided by a RIA and so appears to be a model which could work in a UK regulatory environment.
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