A lot has appeared in the news lately about automated on-line advice programmes being developed to fill what is called the ‘advice-gap’. Stuart Erskine of CG Financial Technology and Paul Resnik of FinaMetrica have published a paper on this.
I believe that such systems might work for those with simple needs and fairly low levels of investment. Robo-advice might be better than no advice but there are systemic risks to this approach and some serious regulatory and suitability issues to be addressed.
When we, as advisers, use computerised tools to analyse client situations we are rightly told that we must not allow the computer to overrule our professional judgement.
Robo-advice will not offer such professional intervention, though to that end a so called ‘cyborg’ option, in which a human component is needed might also be made available but at a higher cost.
Resnik says the big question is whether some of the ‘big UK players’ will associate themselves with such systems and risk the next ‘market shock’ revealing serious shortcomings in suitability.
I believe that the systemic risk will extend beyond the advice suitability issue to the type of packaged investment solutions most likely to be used by such systems. These low cost, primarily passive instruments, have had considerable inflows of business in recent years as a result of several factors. These factors include advisers looking to fill the advice gap through low cost investment solutions and many pension auto-enrolment products.
I remain deeply suspicious of the computer algorithms being used in these passive investment portfolios. When cost is the major factor and professional judgement plays a lower or non-existent part in asset allocations, I can see only trouble ahead.