Robo-advisers, latest technology vs human financial advice
19th July 2018 2611 - Blog Posts
Have any robo-advisers really come up with technology to rival human, face-to-face financial advice?
The robo-adviser sector has steadily grown in the last decade since the inception of online trading platforms. This first iteration has progressed to spawn an influx of robo-advisers that rely on intelligence and complex algorithms, rather than human decision making. There are robo-advisers that deal with clients across the whole spectrum of wealth from those launched by investment banks, such as Investec, and aimed at higher value investment, to those at the other end of the spectrum, such as FiveraDay, which targets those who are looking to invest smaller amounts.
Robo-advisers and regulation
The robo-adviser market has seen such growth that it attracted the attention of the FCA, prompting a statement in December, and a review of some firms last month.
The FCA raised some concerns about the way that robo-firms were giving advice to clients. It stated that some firms were not properly disclosing prices and services, leading to a risk that clients were not receiving suitable advice. The regulator highlighted unclear fees, and the possibility that firms were not collecting enough information about vulnerable customers as cause for concern. It concluded that many of the firms it sampled, in its May report, had made ‘significant changes’ to their model, and that it was continuing to work with robo-advice companies to make further improvements.
The FCA was clear in its encouragement for the future of robo-advice: “We continue to encourage innovation in automated investment services. While this is an evolving market, our rules on suitability of advice apply regardless of the medium through which the service is offered.”
From a compliance perspective then, the main issues with robo-advisers seem to be a lack of clarity and whether individual risk is being managed appropriately, which the FCA is trying to counter with its Advice Centre for robo-firms to seek regulatory feedback and advice.
After the May report, several robo-advisers hit back at the criticism saying that their sector is still evolving. Andrew Morrow, Chief Executive of Evestor, said: “We sit behind regulated advice and therefore we will tell someone if they should be investing or not and into which product. This means that a large percentage of our users we tell not to invest. We can also track where those people go from our site having been told not to invest by us. We also provide access to human advisers through appointment.”
Does the technology rival human advice?
There are some big variances in the technology underpinning robo-advisers, while some are using AI and complex algorithms to offer very intuitive advice; others are using a far narrower spectrum of automation. Some platforms are using decision trees and chatbots to conduct the initial investor screening and evaluation, for example, which can work very well for simpler cases but might be less effective in more complex situations. The newer wave of robo-firms are moving towards harnessing artificial intelligence to make the decision-making process more intuitive.
Is an AI/Human Hybrid the best option?
One of the key themes that the FCA picked up on, last year, was that the typical model of robo-advice that would emerge was a blend of human intervention and automation. Some firms say that is already the way that their business model works, with AI and algorithms performing the heavy lifting and some human intervention taking place at the end of the process.
A hybrid model can offer many of the benefits of robo-advice including speed, convenience and automation – but the human element can add flexibility for a customer’s changing needs or individual situation.
Industry experts certainly seem to think that there is still a place for human interaction and that hybrid models are the direction the robo-advice industry will take. A recent study from financial research firm, MyPrivateBanking, predicts that hybrid robo-services will grow to a size of $16,300 billion, 10% of the market share, by 2025, while it estimates that purely automated robo-advisers will have a market share of 1.6% at the same stage.
Robo-advice is a very broad topic, and this is a just a snapshot of the current market and regulatory concerns. Lawson Conner are global compliance experts who have helped high-profile clients all over the globe to cut costs and risks, if you would like more detailed advice about robo-advice and the regulatory framework, please contact us.