Michael Klimes explores whether human and robo-advisers are friends or foes
MPs have added to scepticism in the advice community over how well digital services can work for retirees.
The work and pensions select committee released its final report earlier this month after an inquiry into pension freedom and choice. While the MPs say there is a clear role for automated services in providing cheaper advice, the public continue to lack confidence in them.
The committee has called on the FCA to conduct and publish a review comparing consumer outcomes from face-to-face and automated advice to create greater certainty.
While advisers are supportive of the committee’s recommendation, there are different views about what is more effective for consumers in retirement. Some argue robo-advice should, and will eventually, have the upper hand. This is because it is cheaper and can potentially reach more savers than traditional face-to-face advice.
Others say the human touch will always be more sensitive to clients’ needs than technologically driven solutions. Drawdown may be one example, where market movements need to be monitored alongside how much money clients take out of their pot.
Many believe the answer lies somewhere in between, and say human advice and robo-propositions complement each other as the market eagerly awaits the next steps from the regulator.
Reacting to the committee’s recommendation, Signpost Financial Planning director Nigel McTear says: “I don’t see any downside from the FCA looking into this and I am not sure they [robo-advice and face-to-face advice] are in competition with each other, as there are not enough active advisers anyway.
“It makes sense, as there needs to be a solution for people who, for whatever reason, do not have a regulated financial adviser able to give face-to-face advice.”
Need for caution
However, McTear warns that people should not get carried away with the potential robo-advice has to plug the advice gap or handle the complexities of drawdown.
He says: “In the US, robo-advice is more widespread but it has run into problems with litigation regarding bad advice. If they are having problems in the US, you can guarantee we will have the same problems here.
“What robo-advice does not do is assess risk properly, as it is relatively simple and clients can be shoehorned into a solution that is not good for them.
Robo-advice is more suited to accumulation than decumulation
“Face-to-face advice is always going to be the gold standard and robo-advice is behind it.”
When it comes to the complex demands of clients in decumulation, McTear adds: “In drawdown, the sequencing risk is greatest in the first 10 years, and if you get it wrong the client can be left penniless.
“If there is disappointing investment performance in the first decade of drawdown, then there needs to be a difficult conversation with the client about reducing the rate of withdrawal.
“This is not an easy conversation to have, and how would the robo-advice proposition approach it? Robo-advice is more suited to accumulation than decumulation.”
Red Circle director Darren Cooke agrees with McTear that, ultimately, face-to-face advice is the ideal solution. He says: “The best option will always be face-to-face personalised advice, but that will not be for everyone so there has to be an alternative.
“The technology is there to allow for an online service – it is not and never will be advice without human involvement – and that could be used to provide generally better outcomes for more people than the current market.”
Adding up the costs
Scalable Capital director Adam French says technology is crucial to extending advice to people who are currently cut off from it. “In terms of advice, many people are wearing no clothes as the only option they have is to go to Savile Row when they should be able to buy regular clothes.
“About two-thirds of people in the mass market in the UK sit in cash, are under-invested and are not engaged with their own retirement plan. It is this section of the population that robo-advice can target and help.”
French does not dismiss face-to-face advice and adds: “I recently had a meeting with my uncle. He is close to retirement and he was looking for face-to-face advice.
“It would cost £7,000 to implement the advice, then 2.5 per cent as well as an all-in fee for ongoing advice and investments.
“But most individual circumstances are not so complex, and any money you take out of the customer’s plan is money removed from investments.”
For CWC Research managing director Clive Waller, the main benefits of automation are that it should reduce costs for those who can least afford them.
He says: “There is a huge place for automation and a lot of advisers have not yet embraced it. One reason for this is a lot of the technologies they use do not talk to each other well.
“For instance, cash-flow planning software is not joined up and every pound you take out of the pot means the client is getting less income.”
Waller adds: “In my ideal world, say I had a drawdown pot of £500,000, I would talk to an IFA about my options and then I would set up the strategy.
“Once I have set it up, I want zero cost. Why should I pay an IFA 1 per cent of my assets every year just for a mechanism to pay me an income?
“Once it is set up, I don’t want the IFA involved. It is too easy for a bad IFA to make excuses and take the money.”