Aye, robot? Robo advice at a crossroads in the UK
Robo advice sprung up as a potential panacea to the “advice gap” – situations in which consumers are unable to get the advice and guidance they need – which was highlighted in 2016’s Financial Advice and Markets Review. Four years on, the UK FCA is reviewing the extent to which robo advice delivers on the success outcomes of FAMR, i.e. to make available affordable, high-quality advice and harness tech innovation in the interests of consumers.
Robo advice uses an automated platform (powered by algorithms) to guide consumers’ investment decisions. In the UK, the Financial Conduct Authority – which has been receptive to robo solutions as a scalable way to deliver accessible advice – remains cautiously optimistic about robo services, despite its previous criticisms of suitability failings and unclear charges.
HM Treasury and FCA released the Financial Advice and Markets Review in 2016. The FCA is now reviewing FAMR and is expected to publish its findings (which are likely to touch on the success, or otherwise, of robo advice) in the autumn. In the meantime, it is continuing to provide feedback to firms via its dedicated Advice Unit which was set up to support automated advice solutions.
Recent research by FCA economists has provided useful insight into the receptiveness of robo advice. This research, carried out with a representative sample of 1,800 people, suggests that there is “substantial resistance” to robo advice among consumers.
Reaching out to robo refusers
Among the findings, robo advice offered was rejected in 57% of decisions. Worryingly for proponents of robo advice, it seems that differences in the quality of the hypothetical advice make little difference to whether advice is accepted or rejected: 56% rejected high-quality advice that closely matched their investment aim / risk appetite, while only 58% rejected poor, mismatched advice.
There were also less surprising findings, e.g. that young people (and, particularly, women) are much more likely to accept robo advice. There was found to be general resistance to robots from a “hard-core of robo-refusers” (30% of respondents) who consistently rejected the advice they were offered.
Human after all?
The research suggests that “robo-refusers” tend to be older and less financially literate. This is a particular concern because such people are often at critical financial junctures and looking at options such as accessing pension benefits. At-retirement robo advisers make up a large number of firms signed up to the FCA’s Advice Unit.
These are high-stakes decisions and accessible advice is key. The silver lining in the research – that, of those who refused robo advice, 72% recommended seeing a human adviser as an alternative – is of little comfort if such advice is unaffordable to begin with.
To some extent, the research echoes what is happening in the market. Several robo advisers have closed their virtual doors in the last twelve months and some innovators are turning to “hybrid” models that draw on robot and human interventions to deliver advice and guidance.
What next for robo advice?
There remains, however, plenty of enthusiasm for robo advice across the industry and within the regulator. The FCA has received over 80 applications to its Advice Unit since June 2017 and, according to its website, is continuing to provide feedback to 40 firms which have been accepted for regulatory feedback.
The FAMR review is likely to provide further insight into the FCA’s work in the autumn. However, the latest research from its own economists suggests that creative and adept solutions such as hybrid advice may be needed to convince the robo-refusers, build trust in technology and realise the robots’ true potential.