David Stevens examines how robo-advice could change the face of consumer financial planning and the ramifications for the pensions industry and UK as a whole
The virtue of increasing consumers' engagement in their financial planning and self-provision, for individuals, our industry and UK plc is an obvious one. Indeed, the raft of recent market stimulus such as auto-enrolment, extending ISAs, pension freedom reforms and the Financial Advice Market Review (FAMR) has been nudging and shoving consumers into action, energised by their increased choice and flexibility.
This all sounds good in theory, but there are three critical challenges that require attention if these changes are truly going to work:
1. Confused customers
Paradoxically for many consumers, the joy of choice only serves to create complexity, confusion and resulting disengagement.
And, sadly, the resulting inertia or poor decision-making could leave them with a feeling of under-achievement and disaffection with the whole point of saving in the first place. Research consistently illustrates this - for example, the FCA reported in 2014 that 80% of customers purchasing an annuity lost significant value by not shopping around.
2. Regulator's role
The regulator continues to unstintingly focus on fair outcomes for consumers. Unfair outcomes could arise from an asymmetry of knowledge or low consumer risk awareness. Although a strong regulatory presence is essential in financial markets, the fear and consequences of getting it wrong can play out as a major inhibitor to innovation for providers and distributors, and so a balanced approach to bringing innovation to market is required.
3. Safe distribution from product and investment fund manufacturers
These, playing their part in generating vast consumer choice, need to ensure their products are correctly participating in safe distribution, confident that the selection of their products represents fair value and good outcomes for their end-customers.
The need for expert and objective help to guide customers to good savings, product and investment decisions and build consumer confidence has never been greater. This is exactly the purpose of financial advice and is the essential component that can serve to balance the interests of customers, product complexity and selection risk, enabling the market to function effectively.
This is a problem of a limited 'human advice' supply in the UK today, owing to a sharp drop-off in the number of financial advisers to serve this increased need for expert help. So using technology innovation to automate some or all of the complex processes, decision selection and documentation associated with financial advice has become a desirable and logical solution.
It's advice, but not as we know it
The finTech phenomenon of so-called 'robo-advice' has created a hyperbole of debate on whether it's really possible for algorithms to safely replace what an experienced financial adviser does. And if so, can these lower-cost automated advice solutions actually have the power to generate user propositions that will help persuade customers to pay for advice to fill the much-reported 'advice gap'?
The challenges for algorithms to effectively replicate a regulated service are undoubtedly complex. They include accurate, digitalised data collection, turning human decisions into 'zeros and ones', and creating the risk and governance controls to validate the systemic quality of the automated advice. In addition, the extent of seamless integration with human advisers (referral scenarios), an engaging user journey and smart software engineering are all crucial sub-components of innovation.
Robo-advice is a firm reality now, with over 40 participants in the sector. Closer examination reveals that most of these aren't fully 'robo' (and many don't actually 'advise'). Most to date focus on generating 'simple' discretionary investment fund solutions, typically from new direct-to-consumer brands. But, increasingly, existing advisory practices are seeking to adopt advice automation, integrating it with their existing business models to gain the advantages of efficiencies and extended customer reach offered.
However, in the world of finTech, things move fast and there is a breed of increasingly more sophisticated players emerging. These new 'advice platforms' construct a full fact-find of the customer's circumstances and preferences (assessing attitude to risk, flexibility, investment experience). Through their refined algorithms they automatically generate regulated advice suitable for complex needs, such as an optimum retirement income, by presenting personal recommendations of blended product solutions sourced across both different provider and product options.
Closely replicating what a human financial adviser does today, it becomes apparent that the more information robos learn about the customer, the broader the range of advice they can generate for substantially limited incremental effort.
While most of the current debate is understandably framed around the extent to which robo-advice can replicate or augment existing services, there is a more fundamental consumer-, data- and technology-enabled revolution gathering on the horizon.
If we dare to re-imagine how today's consumers want to engage in their financial affairs - that is, with elegant simplicity and supported with trusted expertise - this revolution has the potential to radically change on a mass scale how consumers make informed product selections that help them get the most from their hard-earned savings. Bear with me.
Back to the future
So, imagine a world where the management of your financial affairs is decluttered. Where your personal financial data, needs and preferences are securely aggregated through a single expert app that enables you to conveniently and holistically manage your banking, debt, savings, protection and pensions decisions. The app, with five-star customer recommendations and from a brand you trust, analyses your data in-depth and pro-actively streams expert personalised financial information, tips and, importantly, advice, which includes shopping around and recommending products and solutions that take account of your short- and long-term goals. An intuitive, interactive digital experience, perhaps for a low-cost monthly subscription, that also provides access to real experts when you want them. In short, your own personal financial adviser 'in your pocket' helping you get the most from your hard-earned savings.
Other flavours of imagination are also available.
A load of old Hogwarts?
It's much nearer reality than fantasy than you might perhaps think, as many of the component technologies are already 'out there' or imminent. For example:
- Applications exist today that enable bank and credit card data to be consolidated, and with the 'Open Banking Standard' due to be in place by 2019, the ease with which customers can aggregate their data and move services will substantially increase.
- The FCA has launched Project Innovate and FAMR, which are now implementing a number of practical measures to encourage and support finTech and other solutions that make it easier for customers to access advice. Importantly, this includes the 'Pensions Dashboard', providing UK savers with an annual statement on all sources of pension savings accrued, commencing in 2017 and expected to be fully implemented by 2019.
- And, inevitably, social media and other data sources will increasingly empower customers to allow smart apps of their choice to use their information to tailor useful solutions relevant to them without any significant effort on their part.
Will robo be any cop?
Practising robo-advisers are a reality today. As a result, customers can now benefit from a fully regulated advice recommendation from the comfort of their own technology at a fraction of the price of a traditional advice service. Early adopters also hold the critical advantage from their ability to rapidly learn from the data and insights gained and develop the next-generation solutions.
The emergence of sophisticated advice platforms that support a breadth of customer needs and integrate neatly into back-office applications opens up multiple 'white label' partnering options, fuelling new 'help and advice' propositions from trusted brands (not necessarily traditional financial services players). Indeed, the availability of real choice of modernised help and advice apps or services may become the key distribution platform as customers learn to trust and value the specific provider and product recommendations they provide.
The automation of high-quality, affordable and convenient advice has the real potential to help UK consumers secure better outcomes with their complex savings and retirement decisions on a mass scale not achievable today. Whatever your views, the march of robo cannot be ignored and should be harnessed as a transformational opportunity for providers and distributors who wish to connect with consumers in a way that was perhaps, until now, unimaginable.
David Stevens has worked for LV= in a variety of senior positions across
GI and life