What is it?
There are certainly a great deal of definitions, many of which are either overly-complicated or misleading.
Somewhat ironically Wikipedia seems to have summed the situation up quite well: “Robo-advisors are a class of financial adviser that provides portfolio management online with minimal human intervention”.
Actually Paul Resnik at Finametrica has also done a rather good job in providing a bullet point list to define the term.
Is it advice?
No. And this is where I have a problem with the term, it is clearly not advice. At the very most, and only in some cases, it is guidance, but even the providers of such services are extremely definitive in confirming that it is not advice.
Jason Hollands of UK online investment service Tilney Bestinvest has stated: “Robo-advice has become a bit of a faddish term, and it isn’t how we would choose to describe our ready-made portfolios, as we’re not providing advice but a simple, step-by-step process to help investors select a managed portfolio without the need for an advised process.
”Therefore, during the rest of this article, I will refer to it as automation, for specific reasons that will hopefully become clear.
Is it new?
No. For example, Hargreaves Lansdown created a fully discounted online service for UK clients making their own investment decisions in 1996 and an online share dealing service in 1999, plus a web-based “annuity supermarket” in 2000!
It even launched a fully online, non-advised pension product as far back as 12 years ago.
So, I think it is clear that it certainly isn’t new.
What is arguably new is the rate of progress and development in this area.
Should we believe the headlines?
No. Well, at least not always.
“A comprehensive list of businesses identified as offering ‘robo-advice’ in the US suggests investor appetite can be vast”, was the way one recent article commenced.
The same article then highlighted that the 10 major US companies in this area had total combined AUM of only $6bn. That is hardly “vast”.
Even the article pointed out that: “Something approaching $6bn of investor assets might not seem that impressive…..some of our (UK) standalone platforms dwarf that total figure alone”.
I would thus suggest caution when reading or hearing media comment on this subject – and on any subject to be totally honest. Having said that, increased automation is on its way, of that there is no doubt in my mind – we simply need to take a reasoned view as to the degree and the manner in which it is likely to affect our industry.
Can we learn from the US?
Yes. Interestingly, whilst the US is often quoted as an example of how full automation will “take over”, the US market has actually moved in a different direction.
It seems clear to me that semi-automation is more likely to be the shape of the future, certainly in the advice sphere.
What do regulators think?
The UK FCA has laid the groundwork for firms to come to market with automated models. Late in 2014 it launched “Project Innovate”, a scheme inviting businesses, both regulated and unregulated, to introduce innovative financial products and services to the market.
In addition, the remit of the recently announced Financial Advice Market Review includes a focus on the advice gap and the role that automation might have in this.
The Australian Securities and Investments Commission (ASIC), has confirmed that some existing advice firms and new start-ups were looking to develop new robo-advice models and that it is: “…engaging with the industry on these new developments and how they fit within the regulatory framework. We see the potential of robo-advice to offer a convenient, low cost, trusted advice offering to consumers”.
In addition, the EU regulators have just launched a consultation with regards to automation within financial services. Regulators have therefore quite clearly seen the relevance and potential importance of automation.
