I need your clients, your business and your ISA: Robo Advice is coming
The Financial Conduct Authority has proclaimed that they are prepared for ‘robo advice’ models; a new way of delivering financial advice in a low cost, efficient manner, primarily through a technological platform. Robo advice is nothing new; two of the major players in the US have been around since 2008 and one more well-known outside the US has been around since 1975. In the UK, a few early movers have put their heads above the parapet and are offering services that generally follow a cut-down advice process: factfind, set a goal, offer a choice of risk-appropriate funds, job done.
Invariably, the key selling points to this robo advice proposition are low cost (so that’s ETFs only) and slick technology (which is an app on your smartphone). Service likely consists of a monthly newsletter and factsheets for the funds in which the client is invested. Now, I’m not bashing these services – I actually use one for my ISA – and that is where my cautionary tale is rooted. You see, they’re really rather good. Good enough that meatspace advisers should take note.
Clients who do not understand your advice proposition, i.e. that their annual fee is not an investment selection fee, are the ones at most risk. Especially if they are lured by the artfully worded marketing of these robo advice propositions; along the lines of ‘free rebalancing,’ ‘no transaction fees,’ and ‘commission free.’
- Free (/fɹi/): The postage option that takes two weeks to arrive, if indeed it arrives at all, usually heavily battered and damp from an unidentified liquid.
- Not Free (/nɒt fɹi/): The “free next day delivery” available to you when you pay the £79-a-year membership fee.
I’m fairly confident that robo advice is the latter, no matter how cleverly worded their adverts on London Underground are.
But, as the most quoted man in finance once (probably) said: “price is what you pay, value is what you get.” There is value to what robo advisers offer – especially to younger generations to whom having an app that allows them to check their portfolio, make additional impulse contributions and track their progress towards their savings goal is a major selling point. As a proud member of the first generation of digital citizens, who have grown up in a world where the immediate access to near limitless amounts of information is not only possible but necessary, I can vouch that these provisions aren’t gimmicks at all.
Now this might sound like I’m sounding the death knell of financial advice that is delivered by a person rather than an algorithm, but I assure you nothing could be further from the truth. Advice isn’t simply following a decision tree with a pre-determined outcome of investing money into a particular flavour of ETF. Advice considers every facet of an individual’s financial circumstances and makes recommendations accordingly which could be paying off a mortgage early, setting up life insurance or critical illness cover or writing a will, rather than investing into a fund.
So there should be no doubt that the competition is coming and it will most definitely benefit from what I call ‘regulatory first mover advantage,’ nor that those who have been exceptionally successful in other markets like the US will come to the UK, initially subsidised by their overseas success. However, if you can eloquently articulate your proposition and why it isn’t really an alternative to robo advice any more than a bank account is, I’m confident that the flow of clients to each offering will be efficiently allocated. That is to say, those who value and are willing to pay for financial advice will do so and those who are looking for a cheap and cheerful investment platform will flock to the machines.