Tim Sargisson: Robo-advice’s significant economic challenges
The attractions of robo-advice should be obvious to most financial services providers but what is considerably less clear, writes Tim Sargisson, is how to deal with the challenge of building scale
Stifle a collective yawn, if you can, but ‘the robots are coming’ is news again. Channel 4 has a new series, The Rise of the Robots, which will look at where intelligent robots interact with us as equals.
Meanwhile, one national newspaper recently published an article that featured a piece of research by Oxford University highlighting those jobs most at risk of automation. Financial advisers are apparently 58% at risk – though spare a thought for the humble accountant, where there is a 94% chance of being replaced by a new breed of automated auditing and associated number-crunching processes.
Set against this are the views of the Financial Conduct Authority (FCA). First, this month, we heard the warning poorly designed robo-advice could lead to “systemic mis-selling” – this according to Bob Ferguson, who is head of strategy and competition at the regulator.
Second, we learn the FCA will be carrying out an assessment of the suitability of automated advice – something it stated in its evidence to the Work and Pensions Select Committee as part of the review by MPs into pension freedoms. The work will test the suitability of the advice provided and also consider how firms support customers both pre and post-advice, their governance of service and the related risks.
Equally telling was the FCA’s comment that barriers to the market include consumer inertia and the lack of incentive for firms to provide this service given most defined contribution pots are relatively small.
I wrote last month that the appeal of robo-advice was clear for any provider – in short, its ability to streamline, to remove friction from the advice process and, with it, costs. But what is less clear is how to deal with the challenge of building scale. The FCA talks about client inertia as a barrier to entry – but is it not more an issue of client confidence and trust?
After all, there is no avoiding the fact the economic challenges of robo-advice are significant. The current trends in robo-advice point to consumers investing small amounts of money, with08 one leading robo-advice firm talking about having £900m of assets and 45,000 customers – which equates to an average pot size of £20,000. Losses in this firm in 2016 were £9.38m, on turnover of £2.56m – and, by my reckoning, a 4.5 fold increase in assets under administration to £4bn is needed just to reach breakeven. At £20,000 per pot that is another 155,000 customers …
Robots are good at repetitive and tedious tasks, where the inputs and outputs are uniform, but this is seldom the case when dealing with clients. Every aspect of a client’s individual requirements needs to be considered and balanced against their attitudes and nuances. Every one of your clients will be different, along with their attitudes, their requirements. As an adviser, you will instinctively know and recognise this – indeed customer intimacy is your huge advantage.
Confidence And Trust
From a client’s perspective, when investing larger sums, they need to feel confident they are dealing with an adviser who is knowledgeable and who they can trust. In consequence, it is hard to see customers trusting an automated process with larger sums.
And, as a result, it remains tough to see robo-advice moving beyond simple process-driven transactions – for example, opening and administering a simple savings account, allied to administering an ISA and processing the annual allowance.
Nevertheless, as advisers we must continue to raise our game. Other digital touchpoints in our clients’ lives will influence how they think and we must embrace these trends to evolve our businesses. The integration of advice with robo-applications will be the driver for success. In other words, to become a truly digital adviser, you need to let technology take on the simple tasks – automating them and using digital capabilities to support your business and aims.
Published on 21st November 2017
