Will robots advise on your next big investment?
We are relying on algorithms for more and more of our decisions these days. From letting SIRI suggest restaurants and movies based on our past preferences, to learning the latest news from Facebook bots, the lines between face-to-face interaction and automated information are being blurred.
The burgeoning robo-advice industry is taking this trend a step further, relying on algorithmic scores to assist consumers with their financial investments.
If this initially sounds alarming to you, you’re not alone. However, we’ve taken a look at how robo-advice has developed, and how it can ensure that your investments - and the UK’s economic future - are in safe hands.
What is robo-advice?
Robo-advice refers to online systems which replace human financial advisers - offering services either face-to-face or over the phone - with automatic guidance based on market data and consumer preferences.
However, as the industry has developed, robo-advice has become more of an umbrella term for a range of automated financial services, with robo-advice systems now capable of making and managing investments on behalf of consumers.
In some cases, clients of robo-advice platforms are able to sign a single agreement, allowing the system to manage their assets and investments entirely. They will receive regular reports on their finances, but will not necessarily be aware of where their money is invested at any one time.
How does it work?
Robo-advice takes advantage of the enormous amount of up-to-date financial data available online, using complex algorithms to instantly select appropriate investments based on certain information given by a client.
For example, a robo-adviser may ask a new client to answer online questions about their risk tolerance, financial goals and investment objectives. This questionnaire essentially takes the place of a face-to-face interview with a human adviser, giving the robo-adviser important personal data to apply to current markets and investment opportunities. The robo-adviser then uses algorithms to score the information and recommend investments based on the preferences of the client.
Over time, a robo-adviser can build up a detailed picture of the client’s financial behaviours, based on which recommendations they choose to act on. This will allow for more closely-tailored advice in the future.
What successes have robo advisers seen already?
In the United States, robo-advice is already a burgeoning industry, with top robo-adviser firms having grown by 65% in the eight months from their inception to the end of 2014.
A report from Cerulli Associates suggests that robo-advice platforms in the USA will reach $489bn in assets by 2020, from a current $18.7bn.
A 2016 report by Accenture showed that 46% of US consumers are open to switching to robo-advice systems, while 43% of Canadian consumers feel the same way. Of these, 49% seek robo-advice to help them allocate investments, while 47% would welcome robo-advice on what kind of bank account to open, and 69% would trust robo-advice on retirement planning.
In comparison, the UK market is still hesitant to adopt robo-advice, with less than £1bn of assets in Britain currently covered by robo-advice services. However, with proposed changes from the FAMR highlighting the need for quality robo-advice, this could all be set to change.
How can robo-advice benefit the individual?
The most attractive feature of the robo-advice industry is a relatively low cost compared to that of a traditional finance adviser. Current robo-advice platforms are targeted toward investors who need help with simple investment choices - particularly first-time investors or those with a more modest amount to invest. Robo-advice is also a viable option for investors with one-off enquiries, such as where to invest an ISA allowance.
This is a demographic that may not have previously been able to afford the financial advice needed to successfully start their investment portfolios. With readily-accessible robo-advice at a much lower price, these individuals will be able to confidently invest their assets without being put off by thousands of pounds of adviser fees.
It is better to see robo-advice - in its current state - as a service that takes the specific task of choosing and monitoring investments of your hands, rather than a one-stop shop for financial expertise.
How can robo-advice benefit the wider economy?
This so-called ‘advice gap’ has been created in the aftermath of the Retail Distribution Review of 2014, and marks the discrepancy between those who are able and willing to pay for financial advice, and those who are less so. Those looking to invest a large amount of money tend to see value in paying for quality financial advice, whereas those with a more modest sum may seek ways around paying an adviser.
As part of the mission to close this gap, the FAMR recommends the implementation of robo-advice systems to exponentially increase the availability of financial advice, and drastically cut the costs. This will have the wider benefit of encouraging more people to invest with confidence - not to mention giving more investors the opportunity to realise how valuable further financial advice could be to their needs across the board.
Rather than seeing robo-advice as an ends in itself, it pays to consider it as a means to introducing more investors into the advice loop, and demonstrating how both algorithmic and traditional advice can increase their assets.
Will robots steal my job?
Interestingly enough, evidence from the US market suggests that adopting robo-advice alongside traditional face-to-face interactions is in fact a significantly more popular option for consumers than a robo-only system. This implies that overall, robo-advice could provide a positive future source of income for existing advisers.
While algorithmic systems select appropriate investment opportunities for clients, human advisers will have more time to seek and service clients who need extra interaction.
After all, while we’re happy to let Google algorithms suggest local places for us to eat, a personal recommendation still goes a long way when it comes to a meal for a special occasion. Or as the director of the Finance and Technology Research Centre, Ian Mckenna, says: “Using one of today’s digital advisers is a bit like going to the pharmacy and asking them for advice rather than going to see your GP.”
Over all, robo-advice should not be seen as a substitute for personal financial services, but rather as a valuable addition that can attract new clients from across the consumer market - particularly those who may have previously been hesitant to pay for investment advice.
Would you trust a robot to manage your money? What’s your opinion on the future for robo-advice in Britain? Let us know via our LinkedIn or Facebook. Find this article interesting? Check out the new developments in robotic prosthetics.