Robo Advice – The catalyst for transformational change
In today’s electronic age, it is virtually inconceivable that an industry still exists that has not been fundamentally altered by rapidly changing developments in digital technology. The financial advice sector, however, is one glaring exception.
In spite of fundamental regulatory change arising from the Retail Distribution Review and the arrival of pension freedom, technology has yet to transform the way in which financial advice is delivered.
A so called “advice gap” has emerged excluding those who either have too few assets to merit the attention of professional financial advisers, or who are unwilling or unable to pay for financial advice. Pension freedom has made it overwhelmingly important to tackle this deficiency. Every year hundreds of thousands of consumers reaching retirement have the critically important decision to make of how to secure their retirement income. They need advice. The FCA sees robo advice as a major part of the solution and accordingly, is making major efforts to encourage its development.
The Financial Advice Market Review (FAMR), jointly commissioned by the FCA and HM Treasury in August 2015 and published in March 2016, places considerable importance on the role that technology, such as robo advice, can now play in creating a more inclusive, accessible, engaging and cost-effective advice market in the UK.
The rationale for this is obvious. By automating the advice process so that it can be delivered remotely and driven by the consumer, costs will be cut sharply as a result. At the same time, consistent quality and thorough documentation generated by the process will provide a full and reliable digital paper trail to ensure regulatory compliance. Finally robo advice offers a scalable way to deliver advice not dependent on the ability to recruit, train, motivate and retain growing numbers of financial advisers.
However, against these positives, two very considerable negative concerns currently exist.
The first is to do with regulation.
Although the FCA issupportive of robo advice solutions in principle, the key point in practice is that the regulator has not lowered the suitability standard of the advice given. The advice can be focused on a particular goal but the consumer’s other financial circumstances must be considered to ensure that there are no higher priorities which might make the advice unsuitability.
The second concern is to do with the level of consumer demand. Beyond a small number of highly engaged investors, there seems to be little sign, in the UK, of pent-up consumer demand for new ways of making investment choices. Indeed, in the fast-growing field of auto-enrolled pensions, the vast majority of new members are not making any investment decisions at all. Instead, they are simply accepting the default option provided for them.
This only helps to highlight that for any robo advice solution targeting the less engaged or savvy investor:
- Recruiting customers will be slow and difficult, and unless organisations are well-supplied with accessible prospects, it will be extremely expensive.
- Even among those attracted to tackle a robo advice proposition, drop-off rates through the advice process will potentially be high. The large majority of these customers will lack the engagement, enthusiasm and confidence to persevere through what, if it is avoid future regulatory comeback, is bound to be a “longish” process to achieve a final investment decision.
- Some consumers need more help than others – possibly because their circumstances are complex. Rather than lose them it is important to be able to offer another option – advice over the phone or even face to face. Robo should be part of an integrated advice solution with the consumer in control and able to decide how much help is needed. The technology and advice process should be consistent between each of these options so that consumer can move seamlessly and cost efficiently between them.
So what does this mean for the future of robo advice in the UK?
Undoubtedly, there are some large obstacles to overcome if robo advice is to be successful. But instead of thinking narrowly about the potential for robo advice let’s think on a much grander scale as to how digital technology can be used to make financial advice less expensive, more reliable, more accessible and much more engaging.
Ultimately, the real, and bigger, challenge is about how new strategies, combined with new technologies, can help re-invent the financial advice industry in ways which will work better not only for the industry but the regulator and consumers alike. Robo advice can be the catalyst for that change.