The rise of the robo-adviser

2015 was defiantly the year that robots finally arrived in the UK investment area. So-called robo-advisers, or automated investment services, are now firmly established in the US, where fund groups and specialist firms have pioneered algorithm-based investing, and it seems momentum is now gathering behind the movement here too.

Demand for low-cost online investment propositions is being driven by a combination of factors, among them the effects of the 2012 retail distribution review (RDR) – including the widening of the advice gap and greater scrutiny of costs – and the fact that consumers have become increasingly comfortable running their financial affairs online.

But what do we actually mean by ‘robo-advice’? The term refers broadly to automated online technology where risk-profiling questionnaires help investors identify their goals and establish their appetite for risk, using that and other personal information to recommend (and usually manage) a suitable low-cost (typically passive-based) portfolio.

You could see them as a simplified, direct-to-consumer variation on financial advice, using algorithms instead of humans to reduce the cost and make it more accessible to the mass market.

One issue is that robo-advice sites don’t (yet) provide full advice where the individual’s circumstances, tax position, objectives, existing holdings and other factors are taken into consideration during the process.

The robo-advice spectrum is a broad one, from insurers and fund supermarkets to specialist firms focused on simplified investment advice and perhaps a bit more. It’s all quite blurry, despite the efforts of the Financial Conduct Authority (which is encouraging online advice developments through Project Innovate) to clarify advice definitions.

One of the key selling points of online advice propositions is the lower costs, compared with full advice. This will include the cost of the wrapper, ongoing management costs and any ancillary fees, such as exit charges. The latter are usually nominal, if levied, as the advantage of slicker technology is that exits and transfers tend to be quick and cheap to process.

But there are risks in relying on automated risk and suitability tools. One concern is that investors are wedged into pre-defined models that don’t accurately meet their needs. However, automated advice services are evolving all the time and will continue to do so as technology develops and new entrants join the fray.

It remains the case that if someone wants to go online but needs hand-holding advice, they’ll struggle to find that without human interaction. It’s clear, however, that forward thinking firms will start to embrace automated advice as part of their wider client proposition, so robo-advice is definitely here to stay.

Look out for ‘AGL Simply Invest’ in February 2016!

Craig T Gibson, Managing Director

AGL Wealth Management Ltd