Written by Adam Jones, Guest Blogger on Tuesday 27 October 2015
I was at the Platforum Annual Conference a few weeks ago and unsurprisingly robo-advice was a recurring theme. Interestingly though, one aspect of ‘robo’ which stood out more than most to me, was that no one seemed very clear on what it meant.
So, in my continual war on meaningless buzzwords (and yes, we do work in the right industry for that), I’d like to propose some clarity on the issue. The topic will no doubt be picked up as a key theme during ‘Project Innovate’ and in the output of the Financial Advice Market Review (FAMR), but as these initiatives won’t be producing anything for a while, I thought I’d have a stab at clearing things up myself.
What’s in a name?
From most of the conversations I’ve had, I think ‘robo’ is actually covering two distinct and different types of proposition.
The first of these is the automated or partly automated delivery of the advice process. Many of the solutions still involve real advisers to some extent but aim to take the steps of the advice process that we know and love, and execute them automatically.
This is creating propositions which are cheaper to operate for firms and thus cheaper to procure for customers. The advice is also delivered in a way that is often more engaging to an increasingly internet savvy user base than the face-to-face interaction where the advisory sector has traditionally made its bread and butter (or should that be tea and biscuits).
Importantly, this type of service is most definitely regulated financial advice. It results in a personal recommendation and carries with it all of the liability associated with that. A couple of examples of this type of service are the offerings from Money on Toast and Wealth Wizards.
“Robo-advice” sounds like a perfect term for this type of service but it is not what the term is typically used for!
Our second type of proposition is a service where the customer picks a goal, a timeframe and a risk rating. The customer is then presented with a suggested portfolio (usually from a range of pre-packaged investment solutions) and a proposed investment amount. If the investor chooses to go ahead, their contributions are invested into the selected portfolio and it is managed for them in line with the agreed investment strategy, rebalancing as required.
Importantly, clients using these services do not provide lots of information about themselves, and the companies providing these services usually argue that they do not constitute regulated advice as they are not providing a personal recommendation. Some examples of these service could include Fidelity’s Headstart, Nutmeg and Hargreaves Lansdown’s Portfolio+.
Using the term “robo-advice” to describe these seems highly inappropriate as they aren’t actually providing advice and they aren’t really delivered by a robot. Ironically, that’s exactly what the term usually describes.
An alternative approach
So, what would be a better way of describing these services?
In our first set of examples, a personal recommendation is being delivered, and as such, it is definitely regulated financial advice. Granted it is often simplified and/or restricted, but it is advice nonetheless. As such, I can’t help but think ‘automated advice’ is a better term, and one which has broader coverage depending on what kind of service proposition is being discussed.
Our latter set of examples are really offering automated investing. The goal has been defined, and the risk rating agreed, and then the service is managing a portfolio in (hopefully) as efficient a way as possible to get the client to their end goal.
Over the next twelve months, I expect to see more and more propositions of both types appearing in the market, some developed in house and some using software solutions (such as eValue and Parmenion’s Interact). The problem is that swathes of the industry will perpetuate the approach of getting as close as possible to the ‘advice line’ without actually crossing it. This will be the default position until the regulator finalises the FAMR, and providers pluck up the courage to cross the line into delivering advice and standing by it.
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