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Your robo-adviser will see you now

The need for financial advice has never been greater but would you place your trust in algorithms?


by Michelle McGagh on Apr 21, 2015 at 11:24

Your robo-adviser will see you now

Pensions freedom means the need for financial advice has never been greater but for those who don’t want to or can’t afford to pay for it, a new virtual ‘robo-adviser’ could provide the answer.

The concept of a robo-adviser started in the US. Instead of visiting a real-life independent financial adviser who sets out an investment strategy for you based on your future plans and how much you save, the robo-adviser offers an online wealth management service.

Based on the information you provide, including income, the amount you save, assets, future plans such as an intended retirement date, and your tolerance for risk, it uses algorithms to provide ‘advice’.

There are limits to what robo-advisers can offer, however. They are typically used for constructing and rebalancing portfolios but cannot help with tax and estate planning.

These services have usually been targeted at younger investors, as their low cost means they are more suited to smaller investment amounts. However, as all pensioners regardless of their pension size are given the opportunity to access drawdown, keeping their pension invested and taking an income from it, the scope for robo-advice is broadening.

Nick Hungerford, founder of online wealth managers Nutmeg, doesn’t like the term ‘robo-advice’, because his firm’s service relies on investment experts, not machines, to determine where money is invested.

‘It’s critical to have an investment team behind it, making the changes for different election scenarios or the impact quantitative easing will have,’ he said, adding that in the US robo-advisers are little more than trading platforms that rebalance portfolios.

Expensive advice

Henry Cobbe, founder of The BirthStar Project, which aims to simplify investing, said one of the main problems new retirees would face is finding an adviser to advise them if they have below £100,000 in their pension.

‘There is a cost for delivering advice,’ he said. ‘Advisers do not want clients who have less than £100,000…consumers [who have] below a certain amount of assets or income level cannot get advice.’

A basic financial plan typically costs around £1,500 and the average pension pot has just £40,000 in it, meaning the cost of advice equals a significant amount of the money saved.

Cobbe argued that pension freedom and the mass interest in drawdown would open up a ‘new market’ for ‘advised investment and simplified investment’.

‘People need information…they are not turning to financial platforms and what they need is answers, not questions,’ he said.

Hungerford agreed that online services would help ‘democratise the industry’ and that when he worked in face-to-face wealth management he could only take on clients with at least £500,000 to invest.

‘Now we are saying people with £1,000 can invest…the problem we’re having is convincing them that it’s not too good to be true,’ he said. ’Take someone with one ISA or pension and they say ‘I’m not wealthy enough’ but they are and they are worth it. [The industry] has spent the last 200 years saying investing is for the mega rich rather than individuals…charging a lot and making a lot of money…now everyone can access it.’

Drawdown opportunities

The prevalence of drawdown means providers will have to evaluate just what they offer people for their money, and advice in one form or another will have to be a part of the package. The package will also have to be cheaper, with many industry experts predicting a cap on drawdown charges of 0.75% a year that will match the workplace pension charge cap already in force.

Tim Banks, who works in the pension strategy team at AllianceBernstein, said: ‘[Pension scheme] members are still going to need help and be given sensible ways to access their savings, and [for a total cost of] 0.75% there will need to be embedded advice in that product.’

He added that ‘advice’ could be in the form of investment pathways which push investors into a certain model of investments, a default option for investment, or a technology solution, such as robo-advice.

His colleague David Hutchins said robo-advice had encouraged savers to take a greater interest in their finances and that ‘engagement was longest [with] robo-advice’.

There are limitations to what can be achieved through the use of algorithms however. The main concerns is that investors are shoe-horned into investments determined by a generic risk profile questionnaire.

Cobbe mentioned the regulator’s review of risk profiling tools, in which it said unsuitable investments were being made because the outcomes were too generic.

He said that risk profiles meant savers effectively ‘end up with a default [investment strategy]’ with ‘lots of people in the same place’.

1 comment so far. Why not have your say?

Alan Tonks

Apr 21, 2015 at 17:24

Heavens they have been around for ever, they are known as call centres.

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