Whatever happened to the Advice Gap?

Whatever happened to the Advice Gap?

“FCA blasts robos over suitability failings.” That was the headline earlier this week in New Model Adviser. 26 comments from advisers followed in the next 24 hours along broadly similar lines; it’s about time the regulator got tough with the robos.

To be fair to the FCA, the language used in its website summary of the first two reviews was less inflammatory, but the substance was broadly as reported. Here are a few extracts from the FCA web page:

  • Some firms did not make clear whether their service was advised, non-advised, discretionary or non-discretionary
  • Many firms offering ODIM services did not properly evaluate a client’s knowledge and experience, investment objectives and capacity for loss in their suitability assessments
  • Firms should consider how to improve the amount and quality of client information collected during the auto advice process.
  • Firms need to make sure client information is not materially out of date, inaccurate or incomplete when undertaking a decision to trade.
  • Firms should consider how their processes and record-keeping might be improved to limit potential harm to customers.

Nowhere on the FCA web page or in the NMA article or indeed in any of the comments that followed does the term “advice gap” appear. Nor is there any mention of a UK savings gap estimated at over £300bn by the International Longevity Centre. These are the real problems robo advice should be targeting but nobody seems to be measuring progress against these macro challenges.

Instead the FCA is busy subjecting robo advisers to the same scrutiny it applies to face-to-face advice firms. Judging by the comments in the NMA article, some advisers see this as entirely appropriate and I’m sure they, and the FCA, would argue that the regulator has no choice but to implement the rules as written. The thing is, those rules were written by the FCA and they need to be re-written to reflect a new reality in the wake of RDR. There are up to 10 million UK consumers who are no longer able or prepared to pay the cost of traditional advice services but who urgently need to save if they are to have any prospect of a decent retirement. These are the people robo advice needs to help.

They don’t care about legal definitions. They don’t know about investing. They don’t want to spend hours doing psychology tests. And the far greater harm they face is not investing rather than choosing the wrong investment. What they need is a better return than cash for a little bit more risk via mainstream assets and at a lower cost than traditional channels. All of this is entirely feasible and could be offered seamlessly to mass market clients by high street banks based on data they already know about their clients without requiring lengthy fact-finding or risk questionnaires.

The only problem is, that would require a serious shake-up of the regulatory rulebook. Rules that make it possible to rely on data an organisation already knows about its clients – the way Amazon does. Rules that allow the regulator to assess and kitemark low risk products – the way NCAP works. Rules that enable a robo advice firm to have its algorithms audited and approved – the way ISO works.

Instead we got FAMR from a regulator that seems systemically incapable of seeing the bigger picture.

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