Would the US style hybrid Robo Advice offerings be suitable for the UK?
Unlike many of their counterparts, both FutureAdvisor and SigFig are hybrid online investment advisers. Not only do they provide free automated financial planning solutions but also allow investors to contact financial advisers directly.
Could FutureAdvisor’s and SigFig’s hybrid robo-advice offerings meet the UK’s suitability requirements in the same way as we saw earlier with Personal Capital’s model? To find out, we take a more comprehensive look at the processes undertaken and the services offered by these two robo-advisers.
FutureAdvisor currently offers three different services. These are: college savings, investment management and retirement planning.
This forms part of FutureAdvisor’s free service and enables investors to check whether they are saving enough to meet future college fees. By simply answering a few basic questions, FutureAdvisor’s tool can create an optimised plan to help investors fund for their children’s future educational plans. In addition, as part of their free service, FutureAdvisor can open and manage the recommended accounts on behalf of the investor and can also process the payment of the college fees directly from their client’s account.
FutureAdvisor can directly manage an investor’s assets. If an investor chooses this option then it will fall under FutureAdvisor’s premium package which costs 0.5% a year. However, at present, FutureAdvisor only directly manages assets held with either Fidelity or TD Armitrade.
FutureAdvisor’s premium service also includes the following:
- Automatic portfolio rebalancing
- Automatic investment of cash
- Tax loss harvesting
- Access to a dedicated team of financial professionals
Based on age, expected retirement date, annual income and a basic risk profile, FutureAdvisor’s robo-advice solution tool analyses an individual’s current portfolio across multiple accounts and provides a target portfolio.
The tool breaks down the individual’s current retirement plan into nine best practices including performance, diversification, tax efficiency and fee structures to ascertain how well the plan is performing and to identify any areas where there is potential for improvement. An action plan is then created which is designed to enable investors to achieve the recommended asset allocation. Brief explanations are also given as to why FutureAdvisor recommends these changes within the individual’s investment holdings.
At this point, the investor may choose to implement the portfolio recommendations by themselves or can choose to opt for FutureAdvisor’s premium service instead, where the company will buy and sell the recommendations on the investor’s behalf and monitor and rebalance these investments going forward.
However, no risk questionnaire is included in the tool and it is solely down to the individual to choose from 3 different alternatives, “Conservative”, “Moderate” or “Aggressive” as to which type of investor they think they are. In addition, no supplementary questions are raised in order to test for affordability or establish the individual’s capacity for loss.
SigFig also currently offers three different services. These are: portfolio tracker, managed accounts and diversified income.
By inputting their age, term of investment and a basic risk profile together with predicted income and details of their liquid assets, SigFig’s free portfolio tracking service automatically provides an analysis of the investor’s current portfolio. Additional tools are available enabling investors to compare the return they have received on their overall portfolio or individual investments with the performance of the major stock indexes.
Investors who have a minimum of $2,000 to invest can have the first $10,000 of their investment managed by SigFig for free. SigFig will recommend a portfolio for the investor and continuously monitor it and keep rebalancing it as and when necessary. For investments above $10,000, SigFig charges a fee of 0.25% per annum. As part of this paid service, investors also get unlimited access to expert investment advisers.
SigFig’s unique diversified income is designed to create a varied portfolio with a target income yield of 4%. This paid for service costs 0.5% per annum and is available to investors with a minimum investment of $100,000. It is particularly aimed at those individuals who are approaching, or are at retirement and are looking for an investment portfolio that delivers income rather than growth.
Using an individual’s age, salary and risk tolerance, FutureAdvisor uses modern portfolio theory to build and maintain an investment portfolio designed to maximise investment returns subject to the individual’s particular risk profile.
But how do FutureAdvisor’s and SigFig’s robo-advice models stack up against the FCA’s suitability requirements?
Analogous to Personal Capital, FutureAdvisor’s free service does not use a risk questionnaire and so would probably not be deemed to be giving a personal recommendation, thus avoiding having to meet the FCA’s suitability requirements.
However, although SigFig consumers can choose from 5 different alternatives as to which type of investor they think they are, ranging from “Very Low” to “Very High”, they can, if they wish, complete a risk questionnaire instead. The 4 question questionnaire does, to a limited extent, attempt to ascertain an individual’s willingness and ability to take risk. However, as in the case of WealthFront, SigFig’s limited questionnaire lacks sufficient questions to fully satisfy the FCA’s suitability requirements. Furthermore other requirements to establish suitability are ignored e.g. capacity for loss, affordability, debts and funds for emergencies.
Alternatively, FutureAdvisor and SigFig, through a paid for service, also offer financial planning and portfolio management from its own financial advisers, models which could work in a UK regulatory environment.
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