Robo advice: plugging the advice gap
City watchdog, The Financial Conduct Authority (FCA), revealed in its evidence to MPs’ review into pension freedoms that it will be carrying out an assessment of the suitability of automated advice – robo advice.
Asked by the Work and Pensions Select Committee if there were persistent gaps in the advice market and what might fill them, FCA said: ‘The Financial Advice Market Review (FAMR) identified automated advice as one potential solution – more.
‘The market is currently relatively small. Barriers to the market include consumer inertia and the lack of incentive for firms to provide this service given that most defined contribution pots are relatively small.
‘We have created a dedicated Advice Unit to support firms developing automated advice models.
‘As set out in the FCA Business Plan 2017/18, we will be undertaking an assessment of the developing market for automated-advice models.
‘The work will test the suitability of the advice provided and also consider how firms support customers pre- and post-advice, their governance of service and the related risks.’
The FCA’s Advice Unit was established in 2016 following a recommendation from FAMR to provide regulatory feedback to firms developing technologically innovative models; to date, twenty firms have been accepted and those joining this year include Standard Life (with ‘1825’, it’s advice arm), Direct Life & Pension Services, Investec Click & Invest, Moneyfarm, Multiply.ai, Personal Touch Financial Services and WealthKernel.
FCA reported that the number of non-advised drawdown sales is currently on the rise at 30% compared to 5% before pension freedoms, which prompted it to FCA launch a thematic review into the sale of drawdown products to non-advised consumers.
The FCA said: ‘The review is looking at what steps we can take in the future to help consumers who do not get advice.
‘what steps we can take in the future to help consumers who do not get advice’
‘We are also looking at how firms are complying with the existing rules, including whether they are providing adequate information to enable consumers to make an informed decision.’
In addition to its review into the suitability of robo advice, it also looked at its role with advisors, concluding that robo advice presents ‘big opportunities’ if implemented correctly, but warned it comes with regulatory risk.
At its annual conference, FCA’s Head of Strategy and Competition, Bob Ferguson, identified two ‘big opportunities’ for advisers; the first is a boost to competition in the market through disruption and innovation which could be in the form of competition from new start-ups, or large incumbents working in partnership with innovators to challenge the status quo.
He said: ‘Robo advice is clearly one route through which disruption and competition can be boosted – delivering economy and efficiency and reaching underserved customers.’
‘delivering economy and efficiency and reaching underserved customers’
Secondly, Mr Ferguson said he believed robo advice could be used to help close the advice gap, enabling more people to access financial advice.
‘The Financial Advice Market Review (FAMR) recognised that new technologies could play a major role in driving down the costs of supplying and enabling firms to engage with consumers more effectively,’ he said.
‘If the human adviser can’t service those with relatively low amounts to invest in an economic way, then the automated model may be of great help.’
Mr Ferguson said that traditional advisers did not have to be usurped by the robos, rather they could be used to power a hybrid solution combining algorithms with human interaction; however, he did issue a risk warning, saying that different models had different risks, and it was important firms managed them appropriately:
‘A robo model can help mitigate some of the risks associated with human advisers and managing a large sales force. But the design of the model is crucial – a poorly designed model could lead to systemic mis-selling,’ he warned; this came as research revealed advisors are concerned that the expansion of robo advice could mean potential future regulatory issues for their business.
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