Last week I made some comments about why I’m not a fan of robo-advisors. Fortuitously, the FCA have today published an in-depth review of the sector, which means I can simply point to their authority and make it look like I know what I’m talking about 
Here is the review. Here is what the press think. And here is why it matters:
The service and fee-related disclosures at most ODIM firms in our sample were unclear. Some firms did not make clear whether their service was advised, non-advised, discretionary or non-discretionary. Some firms also compared their fee levels against peer services in a potentially misleading way.
Are customers being advised? Are they having their investments managed? (There’s an important regulatory distinction.) It seems the platforms in question don’t know themselves. If the value and price of the two are different, how can consumers compare them?
Many firms offering ODIM services did not properly evaluate a client’s knowledge and experience, investment objectives and capacity for loss in their suitability assessments.
The only value premise of these platforms is that they tell you what to invest in, otherwise you’d just do it yourself.
As such, this is driven completely by how sophisticated their technology is to ‘automatically’ make recommendations that are personal to you and your circumstances. The FCA are clearly saying that the platforms they reviewed in the sector literally cannot do the one thing customers are paying them for in a compliant manner.
Some firms did not ask clients about their knowledge and experience at all, as they felt their service was suitable for all individuals regardless of their investment knowledge and experience.
Imagine paying 1% a year to be given access to the same ETFs as Jonny down the street because your financial needs are the same. It seems unlikely to me.
…some services failed to request or gather adequate information about customers’ debt and other outgoings. Firms should consider how to improve the amount and quality of client information collected during the auto advice process.
This problem stems from the fact that the suitability process is tied to onboarding. It creates a conflict whereby platforms are incentivised to create smooth and minimal processes in order to keep the customer engaged, but also results in a fundamentally poor assessment of their actual needs.
If I answer 5 questions each with 4 options to choose from about my risk appetite and income, for example, that’s a great customer experience on the face of it. Gets me in the door quickly and I can deposit my money. But I’m only getting advice / management services that are as sophisticated as the quiz.
It leads customers to being categorised into buckets of pre-set ETFs that are defined for set demographics, not the needs of the individual customer.
We expect automated investment services to meet the same regulatory standards as traditional discretionary or advisory services. This means taking a proportionate approach to information gathering while maintaining the appropriate level of client protection.
It’s a sad day when a regulator points out that technology solutions have led to poorer outcomes than traditional physical and human channels. There’s clearly a lot more to do for automated investment platforms to overcome their human, IFA counterparts.
(I’m envisaging an open-banking powered AI that has awareness of my social personality and financial situation, using this over time to amend my investment allocations. When this exists and costs <1% maybe then I’ll consider it as an adequate substitute to doing my own research.)
Most firms in the ODIM services sample were unable to show that they had adequate and up to date information about their clients when providing an ongoing service.
Because where the advice process gets conflated with onboarding, why would you take the customer back to onboarding?
Many platforms cite periodic rebalancing to justify their fees; the idea being that the markets move over time and therefore so should your ETF allocations. Well, the circumstances of customers are also fluid, and if the platform is not aware of this, how can it respond?
One last tidbit…
We also announced our intention to review new entrants to the market in the future.
≈ benchmarking new entrants against higher standards informed by this review and earlier ones. Expect it to be much tougher to launch a new platform from this point onwards.
TL;DR - the true innovation at play here is the ETF. Paying a fee to these glorified online quizzes in order to access them is damaging to investors of all sizes, and it’s unfortunate that it’s been legitimised as ‘fintech’. Spend some time researching what to invest in (and how to invest in it cheaply!) or pay for some real advice.