Cash & Investment Management

The emergence of Robo-Advice – Q4 2016

Tuesday 8th November 2016

The term robo-advice has yet to be given a formal definition by regulators, with the Financial Conduct Authority (FCA) preferring to use the phrase ‘online automated advice models’. However, the Chartered Institute for Securities and Investment uses a general definition which refers to ‘the development of web-based systems which provide investment advice or portfolio management to clients without the (direct) involvement of a human adviser’.

In the absence of a formal definition, the term has become a catch-all for various types of internet-based investment services, however the main focus is to profile clients’ investment objectives and utilise an algorithm to propose a suitable asset allocation model based upon these inputs. The process for firms offering online portfolio management services involves a client survey using standardised questions relating to investment objectives, attitudes to risk etc. These responses are then feed into the algorithm in order to profile the client and allocate them to the most suitable risk-adjusted asset allocation model. There is also ongoing monitoring and re-balancing if necessary when periodic reviews are carried out.

These services are typically low-cost compared to a traditional holistic wealth management service and are targeted at younger investors who are comfortable operating online and also people who are deterred by the relatively high fees levied on the clients of traditional advisors. With regards to the latter, a recent FCA report concluded that there are around 16m people in the UK who could be trapped in a ‘financial advice gap’ where they need advice but affordability prohibits it. Again, there are different definitions contained within this general advice gap definition, including:-

  • Affordable advice gap – consumers who are willing to pay for advice but not at current prices.
  • Free advice gaps – those who want advice but cannot afford it.
  • Awareness and referral gap – those who are not aware that advice is available or where to get it.
  • Preventative advice gap – those who would benefit from having money advice as a preventative measure.


The FCA is keen to promote lower-cost options and sees robo-advice as a potential solution to people who fall into the affordability category and whose circumstances are relatively straightforward. The central question, from a regulatory point of view, and one that is causing some ambiguity, is whether or not advice is actually being given to the client. In this sense, the term robo-advice is somewhat of a misnomer, since, in many cases, the client is being provided with a standardised portfolio solution using index-tracking funds and not advice on particular investment products. In fact some robo-advisors specifically state that they do not offer investment advice. In order to create a clearer and more robust framework, the FCA is looking to produce fresh guidance on what constitutes advice, with the possibility of adding a new classification termed ‘streamlined advice’, which some forms of Robo-advice would fall under.

Traditional advisors initially viewed robo-advice as a threat to their business model, however, most are now coming to the realisation that offering a service of this kind could present an opportunity to widen the customer base and attract younger clients. Also, standardisation, consistency of service and a larger pool of clients should also enable efficiencies and economies of scale, as well as the prospect of robo-advice clients wishing to transition to a full-advice wealth management offering as their financial situation evolves. 

The main vulnerability of robo-advice is that proposed portfolios may not be appropriate – clients may not fall neatly into a particular risk profile or their situation may be too complex.  The robustness of the client questionnaire is obviously key to generating suitable outcomes and may contain ambiguous or leading questions which may not result in a suitable outcome.  The detractors of robo-advice also point to the more intangible benefits of human-to-human advice, such as the ability of human advisors to read clients’ body language to better gauge true risk tolerance or offering guidance and emotional support during periods of markets downturns, without which clients may panic and crystallise losses at the worst possible time.

Robo-advice is already established in the US, where regulation has been lighter and there are a number of firms operating in this space. By comparison, the UK market is relatively small, with some reports stating that less than £1bn of assets are managed via robo-advisors. Whilst regulatory changes in future may open up the market for robo-advisors, current incumbents must operate within the current framework, which places significant obligations on those firms perceived to offer investment advice.

Whether the current crop of robo-advisory services will remain in their current form in future is debatable, however, the sophistication of future iterations is bound to increase and this should add value to the investment management industry in whichever way they are deployed.