By Daniel Lanyon on 14th October 2016
Robo-Advice could reduce the cost of delivering advice to investors says a new report into the fledgling industry.
The technology behind robo-advice has the capacity to dramatically reduce the cost of delivering traditional financial advice to consumers and also pave the way for new direct products, according to a new white paper.
Robo-advice is the name given to the fast growing process of disruption to the asset management industry, particularly in terms of wealth management.
It is booming in the in the UK, with a significant number of start-ups emerging and existing players adapting their business models in the rush to gain online customers for various financial products including pensions and Individual Savings Accounts (ISA) in a more automated way that uses algorithms to build risk-targeted portfolio models.
Nutmeg, which is the dominant player in the market, last week reported its 2015 accounts which pointed to a strong uptick in assets under management, the firm said although they didn’t give exact numbers. This helped turnover to increase to £1.7m up from £635,000 in 2014.
The white paper, published by financial services technology provider EValue, concluded that as a result of the regulatory hurdles in the UK, mostly stemming from the Retail Distribution Review, robo-advice products will need to meet the same suitability standards as traditional advice. Consequently, the streamlining of the advice process will be limited, but it still argued the potential market is substantial.
“If institutions can take the step in adopting true robo-advice, then the behavioural finance and gamification techniques that can be applied in the advice process could boost engagement in a way that has never before been experienced by the financial services industry.”
Bruce Moss, EValue’s founder and strategy director, warned however that the line between advice and guidance must not get blurred in the rush to capitalise on the market opportunity.
“There is no understanding of the difference between guidance and advice among consumers. The FCA states that if a consumer feels they’ve received advice then it can be deemed as such, so there is clearly a pressing need for the financial world to respond. This is particularly urgent today as the majority of UK robo solutions offer guidance rather than regulated advice.”
“And yet, in a post-pension freedoms, auto-enrolment world, there has never been more need for consumers to have access to robust financial advice to assist them in making informed financial decisions”
Nationwide is such bank that is working towards adopting robo-advice solution in the near future. Chris Williams, head of digital advice at Nationwide says robo-advice is likely to lower the cost of advice and it should enable the firm to improve customer engagement.”
“Robo-advice is not about replacing advisers; instead we expect very soon to see a wholesale shift in the way consumers interact with the financial institutions they rely on. It is vital that institutions understand exactly how robo-advice fits in with their proposition.”
“It’s not enough for them to simply white-label something and hope it works for consumers”