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Can robo-advice really work as a substitute for face-to-face?

Can robo-advice really work as a substitute for face-to-face?

Wealth management firms continue to find ways to fill the so-called advice gap for smaller clients that has arisen since the retail distribution review (RDR) was introduced in January 2013.

Low cost investment manager Nutmeg is the latest firm to do so, announcing plans to offer financial advice online. It is not alone. EQ Investors, headed by John Spiers, and Strawberry Invest, also have plans to move into this area.

The logic behind the decision is clear, but the question still stands: can robo-advice really serve as a substitute for face-to-face?

Gilly Green, wealth management practice leader at consultant Knadel, is unsurprised by Nutmeg’s plans to benefit from the widening advice gap. After the RDR was introduced, it became clear the provision of financial advice would become harder for smaller investors. This was particularly evident after the big banks closed their financial planning divisions.

‘We said that there was going to be an advice gap, and why wouldn’t someone try and step into that? There is an opportunity, and financial planning for the smaller investor is relatively simple in the sense that their tax affairs are relatively easy to sort,’ Green said.

The opportunity is there, but how easy is it to offer low-cost online advice to smaller clients?

There is no ‘one size fits all’

Green warns that it is difficult to offer ‘one size fits all’ advice because people will continue to have different life events, no matter how simple their tax affairs are.

‘You can argue that on the very simple side it is doable. But there is no accounting for the individuality of people. You still have to think about capacity for loss,’ she added.

‘I think the balance needs to be between how much of this time do you actually have face-to-face with clients.’

She expects younger people might also be more comfortable having meetings via video conferencing, which she believes could be one of the services that Nutmeg will use.

Green believes the company is in a good position to offer advice because it is not trying to change its ethos or approach.

‘They are in a unique position because they are offering a discretionary service that was very much built around online access and keeping it accessible from a cost point of view.

‘It will also complement the pension product they launched, which has given them a natural in to the advice market,’ she said.

Developmental headache

Strawberry Invest is another firm looking to offer online advice, but founder James Priday believes that it is not an easy thing to develop.

‘I think it is a difficult thing to pull off. It is an area that we have been looking into. I think that it can be executed,’ he said.

He notes one of the key issues that keeps coming up is the distinction between guidance and advice.  ‘Advice is something you can define as a personal recommendation. It is where you draw the line of where that personal recommendation comes from that is important.’

‘If they are just collecting generic data, can that be deemed as advice? I think there is room for it and it is what a lot of the population needs. They don’t necessarily need to have a full-blown advisory face-to-face meeting. I just don’t think anyone has pulled it off yet.’ 

He argues that there will inevitably be boxes that clients fit into, as it would be impossible to provide a bespoke solution. However, he says that there needs to be enough boxes to cover 99% of the people who will be using the service.

He argues that the industry still needs to come up with a solution to meet the needs of those who have simpler affairs.

He added that some people with a lower level of assets at a certain stage of their life struggle to afford a truly independent financial adviser now. ‘When you look at the level of assets, it is a solution that is definitely required.’

EQ Investors is also preparing to launch an online advice offering called Simply EQ. Founder John Spiers said it felt natural for advice to form part of the low cost solution, alongside investment management, for those with a minimum of £15,000.

‘We believe that the majority of people are not comfortable making decisions on the future of their savings and we have designed Simply EQ around giving simplified advice. You still have to go through all of the necessary procedures, but you can narrow the scope of it down to certain areas. That makes it viable for smaller amounts.’

Advice by phone

Spiers said advice will be offered via the telephone and clients can have a ‘getting to know you’ visit at their office.

‘Without cutting corners, what is really most important for the clients is understanding the amount of risk they are taking. The biggest amount of damage that occurs to investors’ returns is from them panicking when markets go through periods of turbulence,’ he said.

‘That occurs because they don’t understand the amount of risk they’re taking. To help clients to understand that, you can explain the implications that a balanced portfolio is at times going to show losses.’

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