Laura Balkarova, analyst at the Insurance Intelligence Centre, comments on the growth of the UK robo-advise market
Robo-advice, or the use of automated technology, is currently one of the most debated topics in the financial advice industry. Earlier this year, major high-street banks were reportedly planning to enter the robo-advisory space. Some wealth managers see the rise of robo-advice as an opportunity while others are concerned about the risks they pose
In the final report of the Financial Advice Market Review (FAMR), the Financial Conduct Authority (FCA) recognised that "technology, including fully automated models, has a key role to play in reducing the cost of advice, making it affordable for more consumers". Under the FAMR recommendations, the FCA will set up an Advice Unit to "help firms developing automated advice models to bring these to the mass market more quickly". The FCA’s new Advice Unit "will be open for business to firms of all sizes" from May 2016.
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According to a Deloitte 2015 report, the leading 11 robo-advisers in the US, including Betterment, Personal Capital and Wealthfront, covered USD19bn assets AUM at the end of 2014, although this is still a fraction of the country’s USD25trn retail investable assets. In 2015, financial giants such as Charles Schwab, Blackrock, Fidelity and Vanguard also launched automated investment services, reacting to the rapid growth of robo-advice start-ups in the US.
The UK robo-advice market is still nascent. However, the FCA’s approval of robo-advice could pave the way for new entrants looking to introduce automated, low-cost digital advice solutions. Since April 2015, hundreds of thousands of clients over 55-years of age have been able to use the new pension freedoms to access their retirement savings. The need for pension advice has never been greater, however, savers with modest pension funds often find it difficult to get advice. Industry commentators now see a real opportunity for robo-advisers, offering services "at a fraction of the cost of traditional, face-to-face advice", to fill in the gap between free guidance and full advice.
The Retail Distribution Review (RDR), introduced three years ago, removed the potential for ‘commission bias’ and improved the quality of advice available to those with larger sums to invest. However, the move to a fee-based advice model resulted in millions of people being unable or unwilling to pay for advice. The RDR led to a significant reduction in adviser numbers and also made it ‘uneconomical’ for banks and adviser firms to serve lower value clients.
According to the FCA’s product sales data, in 2014-2015, about two-thirds of retail investment products, including pensions, retirement income and investment products, were sold without advice, up from 40% in 2011-2012. This trend reflects the lack of consumer engagement with advice, however, it is also indicative of the growth of direct-to-consumer (D2C) and self-served models, and the increased use of online tools in financial decision-making.
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By GlobalDataThere is also a growing interest from financial services firms in automating the process of advice as they aim to capitalise on the evolving technology. According to media reports, high-street banks are also preparing to offer robo-advice services in a bid to re-engage with thousands of retail investors in the mass affluent segments.
In August 2015, LV= has taken a majority stake in Wealth Wizards, a UK-based automated advice firm. The move by established players into the robo-advice area could be considered a defensive response to the growing number of specialist providers, including Fiver a Day, Nutmeg, Money on Toast, Strawberry Invest, Simply EQ, SCM Direct and Wealth Horizon.
Most robo-advisers limit their services to automated asset allocation and portfolio management, however, protection insurance professionals are also investigating the application for robo-advice.
With robo-advice gaining momentum, there is a question of who it will serve – will it cater for smaller investors left without access to advice post-RDR or should advisers be concerned that it will move into the higher end of the market?
According to Holly Mackay, chief executive of consumer website Boring Money, "there is all this lazy thinking that robo-advice will take off among millennials, but it is actually far more likely to find its way into affluent, older households".
