What replaces Robo-advice?
Confronted with a choice of airlines between a fully automated pilot with nobody else in the cockpit, or an airline that used technology to support their pilots, how many people would choose the former to take them on a summer holiday?
Maybe some, but I suspect not many. Nevertheless, there are over 2 million accounts in the UK[1] held with a robo-adviser. Whilst the consequences of robo-advice may not have the same devastating consequences as a pilotless plane going wrong, they can still be quite profound.
Robo-advice has traditionally relied on a very restricted view of a customer before providing direction, and will typically only focus on a simple product, such as a GIA or ISA, assuming that an investment is the right choice for a customer. For example, robo-advice is unlikely to know if any debt with an exorbitant APR exists, which the customer may be better off repaying before investing in an ISA. This would probably be flagged if the customer went through a full advice route. Equally, a robo-advice journey started 5 years ago, won’t take into account any changes to circumstances in that time and customers’ needs might not be being adequately met.
So, with all the focus on the advice boundary, simplified advice, consumer duty et al, why is there not more focus on robo-advice and whether they are providing an acceptable service?
Plugging the Advice Gap:
Robo-advice was initially heralded as a solution to the much-publicised advice gap, allowing people to access a limited service for a reduced fee, or for free. However, whilst the market share as a percentage of customers has grown, the proportion of assets has stayed lower.
The problem of scale has been a recurring issue for providers. Those with more to invest are likely to stay away from them or migrate to a fuller service over time. Likewise, customers who may have ‘dipped their toes in’ at one time, have not increased the value of investments since or may have lost interest without a regular review that would be offered by ongoing advice in a traditional advice model.
Tiered service models are available, and may provide a solution to this issue, however, many have not successfully managed to get this right.
We are left with an advice gap which is getting worse, not better, and looks to accelerate as older advisers leave the market.
The FCA’s eagerly awaited Advice Boundary Review has acknowledged the issues with robo-advice, but without providing any additional guidance to resolve the issues.
The Impacts of Consumer Duty
The challenge of Consumer Duty may prove a step too far for robo advice. The FCA is already looking closely at advisers offering an Ongoing Advice service which doesn’t offer clients a suitable service to match the fee. Robo-advice that does not provide a suitable journey for customers must be clear how they are delivering value for money, as well as delivering good customer outcomes.
Where the customer is going through a reduced service as a suitable price point, this may not be a challenge, however, if customers are not re-engaging or investing more, it could indicate the service is not meeting their expectations.
Technology as a Solution
The world has changed significantly since the first robo-advisers were introduced. The availability of more advanced technology to supplement the service could be the answer.
Firstly, robo-advice could become more sophisticated with the use of AI to allow a more tailored offerings aligned to a more holistic view of the customer. Whether suitable guardrails can be deployed is another matter, but as this technology becomes more mainstream and trusted, it could overcome the customer challenge of putting their financial futures in the hands of a basic algorithm.
Secondly, Open Banking has been a game-changer for many in terms of the services they are accessing through their bank. Many of these are now offering a version of robo-advice. The key here is that Open Banking, leveraged in the right way, has access to a larger suite of information about the customer than a standalone robo-adviser would have. This could include their spending habits, their disposable income, and whether they are currently servicing debt, or have other products that might be useful, such as life cover, or pension products.
Online banking is generally more favoured by Gen Z and Millennials, leading to increased visibility and utilisation of robo-advice. A 2022 Investopedia Survey suggested 31% of Gen Z and 20% of Millennials had been using a robo-advisor, as part of their financial advice journey.
Percentage of respondents who reported using a robo-advisor across Gen Z, Millennials and Gen X.
Source: 2022 Investopedia Survey
The advice gap challenge also presents an opportunity for a different approach to advice by firms that have access to this information, and the scale provided by banking services. Monzo Bank now has over 10 million customers in the UK, with an offering which can direct customers to an investment service. Making this proposition compelling to a younger audience of customers provides a huge opportunity for these types of providers to grab a significant slice of the market, but that relies on them getting the model right.
Robo-advice as a term is probably won’t survive, which is perhaps fine, considering its flaws. But it’s likely that technology is a part of the solution for people who want to access these types of services.
[1] Robo advisers hit 20% market share for the first time in the UK | Boring Money Business
Dilan Oylum
Consultant
