Robo advice may have graced the media for some time, but it accounts for less than one percent of the UK’s non-advised online investment market. While take-up may have been hindered by limited performance data and high customer acquisition costs, there is another challenge facing the online advice industry: suitability.
The FCA’s notice on automated investment services came as little surprise when it was issued last month. The regulator announced widespread observations that some firms’ focus on delivering a cutting-edge investment experience has been to the detriment to the end customer outcome. The notice stated that suitability of advice must apply regardless of the medium through which the service is offered - and in an industry that has been surrounded by issues around trust and transparency, this is more important than ever.
Robo-advisers must have the capacity to consider investors’ needs from the outset and throughout their relationship, from their knowledge and experience, end objectives and capacity for loss. Their rationale and approach must be evidenced at all times so that firms can demonstrate they have done the right thing for individual investors, and stand up to the growing regulatory scrutiny that will be inevitable as this sector matures. With robo-advisers still in the ‘honeymoon’ period in regards to trust, the highlighted need by the FCA for many to make “significant changes to their disclosures and suitability processes” presents a potential reputational risk if cases of miss-selling are identified.
One specific example of this highlighted in the FCA report was on vulnerability, where the FCA noted many auto-solutions relied on clients simply self-identifying and then do little with this information. This stands in contrast to traditional wealth managers, with one large UK firm, for example, providing substantial training to help its staff provide an enhanced service to clients suffering dementia.
So, how does the future look for this new channel? We don’t anticipate automated solutions will disappear, as underserviced customers continue to seek lower-cost alternatives. Existing auto-only advisers, however, will need to revisit their propositions to formalise their advice processes, ensuring the suitability of past and future investments.
Additionally, we expect to see these firms look at the application of smarter and dynamic AI based processes, replacing the more traditional ‘tick box’ based questionnaires currently used by many. These will leverage growing areas such as behavioural science and concepts such as gamification to better profile clients, as well as delivering advanced segmentation to identify clients who are less suitable for an automated approach.
Enhanced technology, however, doesn’t just apply to the automated space, it can also be used to augment traditional wealth managers, removing manual work (for example through consolidated client files) or providing additional client insights (such as the difference between clients believed and actual knowledge of financial markets). This hybrid approach frees up wealth managers to provide added value in those areas in which humans excel, such as identifying ambiguity, understanding nuance and providing a personal service. We believe that this combined model will provide the best possible outcomes and help ensure those wealth management firms that embrace it continue to grow.
As we look to the future, firms providing both automated solutions and human-led advice need to focus on innovation. This innovation could be achieved through better-automated technology, additional tools to ‘augment’ relationship managers or enhanced service offerings. Firms must always be careful however to always innovate for, and not at the expense of, their clients.