Robo advice for smaller pension savers
After their house, for many people their pension pot is their second biggest asset, yet how many people are really on top of their savings and in full control?
With an increasingly flexible workforce and the advent of the much heralded ‘gig economy’ many people will find that they have a number of small pension pots dotted around, probably racking up unnecessary fees and delivering decidedly lacklustre investment returns.
Technical advances now allow robo advisors accommodate the additional complexity of pensions and they are increasingly being seen as a solution that allows savers to consolidate their various pots and invest for the future in a simple and cost-effective way.
Earlier this year Moneyfarm signed a landmark deal to provide a branded ISA and pension service to Uber’s 40,000 drivers in the UK – more – and such deals could become more common as the edges around employment status become blurred.
The robo advisors could also provide a useful home for the auto-enrolled looking to take control of their investments or as a supplementary savings pot where income in retirement from a scheme is likely to be insufficient.
Consultancy firm Accenture found that 68% of global consumers would be happy to use robo-advice to plan for retirement with many feeling it would be ‘faster, cheaper, and more impartial’ than human advice.
‘faster, cheaper, and more impartial’ than human advice
LV= acquired a majority stake in specialist pensions robo advisor Wealth Wizards in 2015 and launched the robo-paraplanner tool this May, which it claims can generate an automated advice report in less than a minute.
In announcing its half year results, which saw operating profit rise by 58% to £83m, LV= chief executive Richard Rowney said: ‘Over the last two years we have invested over £80m in improving our core systems and developing new digital propositions such as our robo-advice service, Retirement Wizard. Our continued investment in digital initiatives is enabling us to both reduce costs and improve productivity. ‘We believe in the importance of taking advice at retirement and are seeing an increased interest in the provision of automated regulatory advice services. With our investment in Wealth Wizards we are well placed to play a leading role in this growing area of the market.’
Lynn Smith, a director of Wealth Wizards says ‘Many of our clients say they feel awkward in face-to-face meetings, preferring an online experience where they don’t feel judged.’
The investment portfolios constructed by robo advisors are based upon a client’s appetite for investment risk, and this can be adjusted over time as an individual’s circumstances change and retirement approaches; younger investors will generally have their portfolios weighted towards higher-risk, higher-growth investments, whereas those on a glide path to retirement will see the balance of their portfolios weighted towards lower-risk, fixed income investments, such as government bonds or gilts.
A key attraction, particularly for savers with smaller pots, is that robo advice can be significantly cheaper than seeking advice from a traditional pensions advisory firm or IFA.
Whilst it is tempting to throw a blanket over them and dub them all robo advisors, the current crop offer very real choice in terms of what they actually deliver, and the way in which they achieve it.
‘very real choice in terms of what they actually deliver, and the way in which they achieve it’
Commentators discern between robo advisors that dispense, er, robo advice and those that offer automated discretionary investment management – increasingly ‘robo investors’; there is also choice in the underlying investments between the start-ups that typically serve up a portfolio of low-cost index tracking ETFs and the traditional asset managers that offer actively managed funds.
With proponents on each side of the debate this is active vs passive, low cost vs potentially higher cost, new kids on the block vs the establishment; a good place to start if you would like to learn more is Muckle’s Compare Robo Advisors.
Wealth Wizards typically charges £65 for investments of up to £30,000, and 0.3%, or £300, on a £100,000 investment pot; that compares with the £580 a financial advisor would charge to advice on a £200 per month pension contribution or the £1-£2,000 for at retirement advice on £100,000.
Most robo advisors offer human support as well and may offer access to additional guidance if your finances are more complicated or you need advice on tax planning services; John Perks, MD of life and pensions at LV= said: ‘when a client needs advice spanning a number of different regulatory regimes, human advice will be required’.
With the World Economic Forum estimating that the collective retirement savings gap of the world’s largest economies will hit £307tr by 2050, future governments would be grateful for any assistance robo advice may provide.
It is likely that in the future financial self-reliance will necessarily usurp state provision as welfare systems are unable to cope with an aging population; those wishing to avoid a nasty shock in retirement would do well to adhere to the principle that underpins Muckle – ‘mony a mickle maks a muckle’.
Many small things combining to produce a larger thing over time is all the more pertinent if that larger thing is a cash fund that will need to sustain you in later life.
‘very big news in the future as the true magnitude of the pension gap becomes clear’
Robo advice is predicted to be a significant force around the world, with consultancy AT Kearney forecasting 68% growth in the market resulting in £1.75tr under management in the next five years.
In the US, which was an early adopter, the market is predicted to grow 29% per year until 2021 and having been a relative laggard, China’s burgeoning middle class is expected to gorge itself on robo advice in numbers rising from 2m currently to almost 80m in the same period.
With the development of robo advice 2.0 and the increasing use of artificial intelligence, it is likely that services will become more sophisticated; as wealthtech evolves robo advice is likely to be just one element of platforms that oversee all aspects of our financial lives, hungry for big data and learning with us and about us on the journey to financial independence.
Those with a penchant for a Hob Nob will be pleased to hear that robo advice is unlikely to do away with homo sapiens advisors just yet, particularly where a customer’s affairs are more complex; the experience in the States is that it will change the way in which advisors work as their previous model of dispensing bespoke advice to a relatively small number of clients is replaced by them giving ‘hybrid’ advice to many more.
According to Mr Perks: ‘Using robo-advice can cut the time it takes an adviser to provide regulated advice for a client from nine hours down to just 90 minutes. This could transform companies’ back office operations, allowing them to offer a cheaper service.’
There is good evidence that robo advice will have a significant impact and the FCA has called on robo advisors to bring innovation to pensions as they roll out their range of wealthtech propositions – more
Pensions are likely to become very big news in the future as the true magnitude of the pension gap becomes clear, and it dawns on individuals that the state may not be there to support them in retirement in any material way; simple, low cost robo advice may be just the job for very many smaller pension savers.
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