Cheers Tommy… we really tried hard not to 
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Thanks and sorry!
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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.
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This is where I see the real opportunity to provide a truly innovative and intelligent service whilst removing the human advisory (read cost) element. It’s certainly complex from both technical and ethical perspectives, especially in terms of using social media footprints to permit access to financial products, but it could be transformative if transparently and robustly regulated, cf. China!
@freetrade_cal yes and yes! financial services firm + app = fintech ≠ (necessarily) innovation in my view, but that’s certainly the narrative. I think that’s the damaging part. Misleading claims and lack of transparency, once exposed will only further erode trust, further dissuading people use the true innovative services or firms.
I also fully agree here, the convenience and reach of these services thanks to community forums and various App stores (as @adam previously referenced) has almost certainly driven interest and uptake to the point in which over 30,000 people have signed up for Freetrade before being able to even use the service. Granted, it’s a small slice (for now) but the likes of Robinhood, Revolut and Monzo are proving as you say these impressive levels of engagement by their customer numbers alone.
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Great find, but I have a serious issue with the reporting here: ODIMs and Auto-Advisers are clearly distinct categories under an umbrella sector, yet this report makes it easy for the 2 to be conflated.
We’re specifically talking about Auto-Advisers here (presumably Nutmeg, Wealthify, Moneyfarm et al).
I don’t see the findings for Auto-Advisers as damning in this report; the conclusion is actually quite positive for this fledgling, evolving industry. What is damning is the findings for ODIMs which you’ve quoted a lot.
The problem is who are the 7 ODIM companies that were reviewed? Who are the 3 Auto-Advisors that were reviewed? They’re not named and this is critical info if I am to interpret this expectations guidance correctly.
From Nutmeg’s terms:
We will provide you with a discretionary investment management service, which means that we make all investment decisions on your behalf.
There’s is not an advised service. It is investment management (“ODIM”) and it is the same for the others you reference. The public’s confusion over this very point is a key part of the FCA’s findings.
I’m afraid the FCA don’t have much choice but to draw such conclusions. After all, they need to be unequivocally pro-competition and pro-innovation in every way. Their actual findings are anything but, and this represents a serious wake-up call to the robo industry.
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I’m still confused. So to clarify does “auto-adviser” mean the same as “robo-adviser”? My impression is yes.
Second, are Nutmeg, Wealthify and Moneyfarm auto/robo-advisors, or ODIMs?
Third, what company is an example of an ODIM? This term is new to me and key to understanding the report so that I don’t conflate the two.
The problem is that the industry / public term is ‘robo-adviser’, but the regulatory permission is investment management. As I mentioned above, advice and management have important regulatory distinctions (hence FCA’s concerns) but nobody, including the platforms, seems to know who is doing what or either.
Advice ≈ based on your circumstances this is what we think you should do, but the decision is yours and you have to make the investments yourself. (The confusion arises where the act of investing takes place on the same platform which provides the advice. In my experience these are few and far between, which is probably why the FCA only reviewed 3 and not 7.)
Management ≈ give us your money and based on your circumstances we’ll invest it in what we think is best. (This is the classic ‘robo-adviser’ as you probably know it. It’s much easier to put together than providing advice and investment in the same place and ensuring that it is categorically advice and not management.)
(The third category of investing is ‘execution-only’, which includes Freetrade - the investor decides what and where to invest of their own accord and takes responsibility for such.)
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Great definitions. Seen so many get this wrong, and have seen teams tie themselves in knots trying to decide how to communicate what advice means to the general customer.
I have found personally the simple formulae below works
- regulator tells us we need to say x
- what this means for you in your interaction with our company
- a scenario or two to illustrate
companies often try to explain all that in a meaningless statement, like the nutmeg one you used, which ends up being regulatory questionable at best and confusing for the customers understanding of the product/service they are getting.
Great example thread here of how consumers can have the these products explained simply.
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‘our intention to review’ sounds like it’ll be some time from now. The issue with making it harder for new entrants without applying the same criteria to existing companies might mean less competition, so higher prices which is also bad, maybe even worse.
Is this not something to be excited about…?
I’m guessing Dr Stange doesn’t foresee this happening again 
This is probably thread worthy in of itself, but this is one of the psychological “fears” of self-selecting one’s own serious portfolio without some form of prepackaged advice:
This is misleading and lazy research by Boring Money.
They cherry-picked the top performing diversified portfolio from each robo-adviser, and compared it to the FTSE 100 (a pure large cap UK equity index).
For a valid comparison, they would benchmark the robo-adviser’s return against an index or custom benchmark that has a similar mix of asset classes (eg an international equity portfolio should not be compared to a UK diversified portfolio) and a similar risk profile (eg standard deviation).
If anyone really wants to geek out on benchmarking, GIPS is the gold-standard: https://www.gipsstandards.org/standards/Documents/Guidance/exposure_draft_public_comment_benchmarks.pdf
Benchmarking is coming to Freetrade, it’s a priority feature. You should know how your investments really compare.
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Very valid point! Adam 1 Boring Money 0 
I look forward to this 
Thanks for the link; will definitely check it out 
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A big chunk of people do not want to be investors, do not have the time or the inclination to do their own research, and certainly do not have the money to pay for proper advisory. So robo-advisors could actually be their own alternative, at least for now.
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Well put! 
We also want to implement an ‘autopilot’ feature to automate your investments.
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Most definitely. A Freetrade Academy or University to help educate the less financially savvy would go a long way. Certain it’s dowN the road.
Modelled multi asset class portfolios with ETFs aren’t difficult to implement given the right resources and tools available, ie understanding your risk appetite and the types of assets that correspond accordingly, portfolio construction tool, simple and intuitive dealing and trading platform, and performance tracking and benchmarking. You yourself know your financial situation better than anyone and you’re the first person to know when you go through a life changing situation. It only takes a couple of minutes to change your asset allocation (as long as you know what you’re doing…) You alone should control your financial future and Freetrade will give you the best and cheapest method to do so!
Love the new group badges! @Viktor
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@Justin, @Cgwinning, this has been raised before:
Freetrade could continue issuing non-advisory but educative articles just like the ones they did post in the blog. However, rather than have them diluted across other articles, Freetrade could have a separate portal with educative content which yet will not be an advice - only facts on what is what.
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Thanks, Justin!
We are lucky to have @Freetrade_Team_Design. 