It is time to draw a line in the sand. ‘Robo-advice' is an overused, misunderstood term that has become the catch-all for advisory products that involve a digital process.
But it's not useful. It doesn't reflect the breadth of solutions available - both for professional advisers and direct to consumers. As the market develops at a rapid rate, as more consumers opt for a robo-advice option and as advisory firms shift their models towards automated support, there needs to be a change in the vernacular so that we put an end to this confusion.
The term ‘robo-advice' has been claimed by many assets-under-management firms and discretionary fund managers. This process is often, however, simply filling out an online questionnaire that then generates a risk level and then the investor is automatically placed in one of five funds. Technically this is an ‘investment platform' and provides guidance in one specific area of investment rather than advice.
Then you look at ‘automated advice' - fully regulated financial advice that is charged on a case-by-case basis rather than as a percentage of assets. It is a completely different product. Automated advice is able to deliver a range of solutions, including the complexity of retirement advice from the planning stages through to at-retirement and continuing into retirement.
And then there is the question of human interaction. I frequently hear people say robo-advice means just that - a robot with no human contact. Where ‘automated advice' really comes into its own, however, is when it makes use of human intervention alongside technology.
Wealth Wizard's Smart Platform, for example, enables an adviser to scale up their advice capability and service new markets. By automating the paraplanner section of an advice session, we are able to help advisers reduce the amount of time spent on admin, quotations and report writing and free up time to deal with more complex issues and support more people.
While the advice engine does the ‘heavy lifting' of fact-based data collation, automated quotation feeds, solution mapping and suitability report generation, the adviser's time is freed up and these efficiencies can then be passed onto the client through lower fees. This also makes advice more accessible to a wider market of people.
With two-thirds (68%) of consumers saying they are open to using robo-advice to plan for retirement and three-quarters (78%) stating they would welcome robo-advice for traditional investing, according to Accenture, there is clearly appetite from the general public.
Yet there is a job to be done to help the public understand the many shades of robo-advice and exactly what they are getting from a robo ‘adviser'. It is also important we communicate with the wider advice industry so we are all on the same page and do not create any additional confusion ourselves.
Now is the perfect opportunity to start to craft a different vernacular that is more representative of the sector. At Wealth Wizards, we prefer the terms ‘automated advice' and ‘advice engine' because it puts the integrity of our partners' advice at the centre of their solutions, driving everything they do and every recommendation they make.
We need to get this right now because change is rampant. While the Financial Conduct Authority is actively encouraging innovation in automated investment services, the first review into automated advice highlighted a number of issues that led to changes across the industry.
And it won't stop there. Regulation has a strong part to play in the future of financial advice to drive innovation and perhaps even further fragmentation of the advice sector, creating segments that are easier to classify and identify with. As we have seen in other sectors, regulation can drive innovation and change - notably, ‘open banking' through the Competition and Markets Authority - and it could be the advice sector is ready for even further disruption.
Indeed, from a regulatory perspective, automated advice provides several benefits. It is more robust and consistent than human advice alone, as it does not rely on subjectivity. This is important for compliance as it provides an audit trail that is able to explain the decisions behind a particular advice case and solution - ideally, mirroring the advice business's advice policy or house view.
Undoubtedly there will always be a place for the human adviser. Although people have gradually embraced online banking, some still want to walk into a bank and speak to someone and, in the same way there will always be groups who prefer to access advice in a way that suits them.
What would be more helpful is to move away from the ‘them and us' vernacular, to one where we recognise the automated advice and human advice hybrid model is rapidly becoming best practice in the industry, delivering quality, affordable advice. It seems probable we will continue to see more advisers embrace technology to help them cope with their workload and service more clients.
As automated advice rapidly moves towards a comprehensive advice capability, it will be able to provide advice on many aspects of a person's financial life, including investments and protection and the need for clarity and accurate terminology will be even greater.
We are already seeing huge leaps in the way we collate data - for example through open banking - and, in the future, this could mean the customer will not even have to provide certain details, as this will be automatically collected through open banking.
Machine learning is also already featuring strongly in advice - for example, Wealth Wizards' Turo is the AI capability inside our Smart Platform that applies machine learning to the factors associated with every advice decision.
Turo will then determine the appropriate advice outcome for each case, showing the factors used - and the weighting of each factor - so the recommended outcome can be explained to the adviser, the client, and importantly, the compliance or quality assurance function.
It is clear this sort of automated advice is a far cry from ‘robo-advice' and its evolution is relentless. In the longer term, we might not be using traditional attitude-to-risk questions - we might instead be harnessing ‘affective computing', which gauges a person's facial expressions and vocal cues to find out their true feelings, fears, aspirations, dreams and attitude to risk.
Combined, this creates real choice for clients. Yet what is right for one person might not be right for another so it is not the time to throw the baby out with the bathwater. Carving a sector that is fit for purpose and suits the demand is key.
The client of the future might directly access automated advice on a smartphone, speak to an adviser who is supported by automated advice technology, or opt for the traditional face-to-face adviser route. The advice gap is growing so there is more than enough of a market out there - we just have to build the solutions that people want, clearly understand and can afford.
This article originally appeared in Professional Adviser