FAMR and the woes of robo-advice
Robo-advice providers should be able to solve the challenge of mass-market appeal, says Tim Sargisson, but at present the sector is still too much of a solution looking for a problem.
Advisers and the profession at large have warned that the lack of visible progress on the Financial Advice Market Review (FAMR) is fast turning into indifference towards what is supposed to be a leading project to transform the provision of advice, robo-advice.
For my part, however, I am surprised that anyone expected any visibility, or a rolling programme of updates setting out progress, because – let’s face it – this is not how it works. When challenged earlier this month, the Financial Conduct Authority (FCA) declined to provide a progress update, which elegantly illustrates my point.
The FCA’s approach will be to conduct its work behind closed doors and – consultation papers aside – the first puff of white smoke will probably be in six months’ time when the FCA and Treasury are due to submit a progress report on the FAMR to Treasury economic secretary Simon Kirby and the FCA board.
Despite this, it is refreshing to be able to report that one recommendation has been completed, which is the launch of the FCA’s robo-advice unit and the setting-up of the financial advice working group. As the advice industry sharpens its pencils in advance of an onslaught of robo-advice propositions being channelled through the FCA, however, a word to the wise.
Last month, a report by IRN Consultants into robo-advice showed that most UK robo-advisers such as Nutmeg are likely to be unprofitable for years to come. Nutmeg’s accounts for 2014 recorded sales of £632,000 compared with an operating cost of £5.3m.
These findings are similar to a report published by investment management firm SCM Direct, which estimated the average UK robo-adviser is making a loss of £162.60 for each new customer in the first year, making just £17.50 a year on each account in subsequent years.
As a result, SCM has warned that UK robo-advisers are “wired” to lose money and most will go bust before acquiring the sizeable assets under management needed to survive.
The robo-advice industry accounts for around £150m of assets under management – just 0.0125% of the £1.2trn the FCA estimates is invested by retail and private clients, and represents a tiny portion, just 0.113%, of the £132bn estimated to be invested in direct-to-consumer fund platforms.
Down The Stakeholder Path?
Robo-advisers appear to be heading down the same path as Stakeholder pensions when volume business was the only game in town, with providers having to service clients for the best part of 15 years before beginning to break even.
In the case of robo-advice, IRN predicts these losses will prevail for around a decade. Stakeholder’s success lay in the repricing of providers’ group pensions back book, but that was merely an unintended consequence.
At the moment, robo-advice is still too much of a solution looking for a problem. Robo-advice is viewed as a technological and regulatory challenge, with too little emphasis on a business model and a strategy that seems to be anchored on the premise that, if we build it, they will come.
The key to its success will be solving the challenge of mass-market appeal without spraying vast amounts of cash around on marketing. In the UK, we have a long history of financial services being sold, never bought – and 25,000 financial advisers on the FCA register testify to that.
Years ago, life assurance salesman used to describe their role as backing up the hearse and letting the widow smell the lilies. While this may be a crude analogy, it successfully encapsulates the robo-advice challenge.
Published on 22nd September 2016
