In May of this year, the FCA published its review into ‘automated investment services’ – or robo advice platforms. In part the findings amounted to a suprising rebuke of their offerings, particularly in key areas such as suitability and service disclosure.
- Advisers need to consider where the FCA feels robos are falling short, so you can capitalise on their mistakes.
- An IFA has several distinct advantages over a robo platform – not least that its customers generally know what they’re paying for.
- Among the FCA’s more alarming findings were that robos, on occasion, weren’t entirely open about what kind of platform they were operating.
For IFAs, this rebuke is quite vindicating. Many financial advisers have expressed concerns about robo platforms, and not purely out of self-interest. These platforms don’t have the experience of human-run IFA firms – but were proffered as the answer to the advice gap following the Retail Distribution Review (RDR).
The emergence of hybrid robo (robo platforms supplementing algorithms with human advisers) has reshaped the advice battleground, and if you’re an IFA you need to consider where the FCA feels robos are falling short, so you can capitalise on their mistakes.
An IFA has several distinct advantages over a robo platform – not least that its customers generally know what they’re paying for.
Among the FCA’s more alarming findings were that robos, on occasion, weren’t entirely open about what kind of platform they were operating. In the review, some firms “did not make clear whether their service was advised, non-advised, discretionary or non-discretionary”, and others “compared their fee levels against peer services in a potentially misleading way”. Given that many robo platforms actively target and naturally attract first-time investors, this could easily lead to confusion.
These dangers are made even clearer among those firms which offer advised services. The FCA’s review highlighted “weaknesses in identifying and supporting vulnerable consumers” among some firms – in certain cases, expecting the consumer to disclose their own vulnerability – while others believed that their service was suitable for clients with all levels of investment experience and subject matter knowledge. The review also highlighted a general dissatisfaction with “the strength of information gathering about clients’ financial circumstances” and noted that it was too easy for clients to choose a different transaction than the one recommended by the algorithm, without challenge.
It’s not particularly surprising that fully or largely digitised services might struggle to provide a ‘human touch’, or judge investor suitability appropriately. We’re already seen instances of one platform considering an investor to be interested in a balanced approach; while another might call them cautious; and another might even call them adventurous. With no common agreement on these basic standards, there will be inconsistencies.
The IFA fightback: how to beat the robos (without becoming one of them)
The review highlighted some important robo deficiencies – but if you’re an IFA, you’ll need to do more than expect these platforms to fail.
Fortunately, a lot of what you need to do will come naturally as an expert human adviser. The relative youth of the robo industry has been accompanied by great innovation, but it is also riddled with inexperience.
Robo-platforms have never been through a financial crisis and could be uniquely susceptible to ‘black swan’ events. Often the algorithms are developed independently and don’t use the same metrics or adhere to the same rules which has in some cases seemingly left them struggling with suitability recommendations. More recently they’ve simply found humans want to deal with other humans, which has left Scalable Capital, Wealthify and Nutmeg all actively hiring or considering human advisers to supplement their digital services.
The latter point should cause the most concern for financial advisers. Because at the moment, IFAs can provide flexibility, tailored services, and accountability. If robos hire human advisers en masse, they are seeking to wipe out that advantage.
Accordingly, is it not worth playing them at their own game? A ‘hybrid’ approach, where non-advised digital investment complements the efforts of IFAs, is one solution. It enables IFAs to reach out to customers looking for low-cost investment management options (i.e. those lost to RDR), it preserves the quality and specificity of access to advice, and it gives IFAs a technological dimension supported by years of proven performance.
Robo-advisers want IFAs' customers; they’re spending millions of pounds on marketing to acquire them. This FCA review is essentially a wake-up call to the automated advice industry - but it won't take long for it to adjust and recover. Robos present a serious threat to a component part of IFA earnings, IFAs need to make sure they're well equipped with their own digital solutions in order to secure their place at the financial advice table.
Lester Petch, CEO, Finch Tech