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Move over robo-advice, it’s time to talk bionically

Robo-advice has gained some traction in the US and Australia, but our research shows that when it comes to investments, consumers still value human interaction. Now the UK’s financial regulator is looking to robo-advice to close the country’s widening “advice gap”. Will consumers learn to trust machines for their financial advice, or will the latest move to “bionic advice” be preferred? Learning from the UK and the US experience, here’s our point of view.

The UK in 2016: A regulator rushes to robo-advice

The UK regulator for investments and general insurance, the FCA, has been leading the charge to robo-advice. Following the introduction of stringent rules on selling in the Retail Distribution Review (RDR), a financial advice gap began to emerge. Early in 2016, the FCA said that up to 16 million mass market investors could be trapped by this gap. The reasons include the high cost of advice, low confidence with financial matters in general and a lack of trust following high-profile misspelling cases. Now the FCA is looking to new technologies – such as robo-advice – to help drive down the costs of supplying advice and enable firms to engage with consumers more effectively. The regulator has moved quickly by establishing a sandbox and innovation hub to make it easier for brands to launch robo-advice solutions.  However, our research suggests that in its purest form robo-advice may not get the traction from consumers that the FCA has hope for.

Plugging the advice gap

Sales of investments peaked in the late 1990s. According to our FRS study, two thirds of these investments were sold via branch staff or through life insurance employees. Sales declined significantly in the early 2000s, coinciding with the fall in staff selling these products. But the decline didn’t impact all consumers equally. It was the mass market segment, with investments worth £20,000 or less that suffered the most pronounced fall, while those with larger sums remained the same.  For those who remember the 80s and 90s, you will be familiar with adage that investments and insurance are “sold not bought”. Tracking their rise and fall over more than two decades, the FRS shows that this saying is still true today. All our research suggests that merely providing access to robo-advice won’t be enough to plug the advice gap in the UK. Consumers - and the mass market segment in particular - need advice or at least guidance to direct them to investments as a viable savings vehicle. 

Lessons from the US: It’s time to talk bionic

The US financial markets have more experience of robo-advice. The market was created by innovative tech start-ups offering low cost asset management via a purely digital interface. The banking sector quickly followed suit – giants such as Charles Schwab, BMO, and Vanguard all acquiring online portfolio management systems in 2015. But rather than encouraging more people to invest, the solutions became commoditized as existing investors adopted them to reduce their annual management charges. In other words, rather than creating a new market, an existing one was cannibalized.

Research carried out in June 2016 by GfK in the US indicates that only 4% of respondents would consider robo-advice for investments. Trusting the advice of a computer is by far the biggest barrier for 90% of respondents. Almost two thirds (63%) of respondents agree that “it would be important to have someone to call on the phone for guidance” when considering to adopt robo-advice. Increasingly, providers such as asset manager Vanguard and Invesco Perpetual are moving to “bionic” advice, where robo-advice is combined with a human touch.

This clearly begs the question, if robo-investments do not serve to attract new investors to a market, can they fill the UK advice gap? Our research suggests that when the mass market group is deprived of a sales person to steer them through their investment decision, they stop buying investments and insurance. And innovative financial services brands are coming to the same view point as GfK. Top ten building society Nationwide is actively engaging with the FCA innovation hub, and is now piloting an in-branch automated service that is assisted by financial planning managers and branch staff.

There remains one major and crucial challenge – stimulating demand. Robo-advice or bionic solutions can certainly deliver low cost solutions to would-be customers, but they won’t create demand. That is the next hurdle to jump.

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