What is “Robo-advice”?


Last month I attended a televised panel discussion, organised by Citywire and Blackrock, to discuss Robo-advice. The video links are at the end of this article.

The term ‘robo-advice’ has not been formally defined by the regulator, and in fact the Financial Advice Market Review (FAMR) does not even use the term, referring instead to ‘online automated advice models’.

Robo platforms are already very popular in the US. Wealthfront, an automated investment platform and Betterment, an online investment adviser, were both formed in 2008 – between them, they now manage £4.5 billion. In the UK, Nutmeg, founded in 2011, was an early pioneer of the online investment model. There are many other new entrants to this market, including Money on Toast, Moneyfarm, Wealthify, Wealth Horizons, Wealth Wizards and Fiver a Day and many of the UK’s larger banks and investment firms have launched, or are planning to launch, their own robo-advice services. (Source: Cisi Professional Refresher https://www.cisi.org/cisiweb2/en/cisi-elearning/cisipr/GetChapterList/166/)

The current position in the UK is confused - some of the companies most associated with robo-advice do not, in fact, offer investment advice - they are actually offering portfolio management services instead.

Firms providing portfolio management online typically ask each client a series of standardised questions relating to the client’s investment objectives and tolerance for risk. The system then uses an algorithm to create an investment portfolio for the client based on these characteristics. The client is not being given investment advice, but instead the firm will create, and maintain, an investment portfolio which reflects the client’s goals while seeking to remain within their risk tolerance.

The difference between such a service and a more traditional service provided by a (human) portfolio manager is that the ‘robo’ service automates the design of the client’s specific investment portfolio; therefore, it might more accurately be described as ‘robo-portfolio construction’ than robo-advice. In both cases, the investment decisions are based on the insights and judgements of human investment managers, but in the ‘robo’ version these views are built into the algorithm which creates the portfolios. As a result, once the algorithm has been created, no direct human intervention is required (although the algorithm would typically be updated, by humans, on an ongoing basis in response to changing market conditions). (Source: Cisi Professional Refresher https://www.cisi.org/cisiweb2/en/cisi-elearning/cisipr/GetChapterList/166/)

So, we can see that the majority of what is currently referred to as robo-advice is not, in fact, advice. However, much of the discussion and development work that is currently taking place with regards to robo-advice relates to the possibility of more advanced systems which would provide a service much closer to the concept of advice.

Such a system might, for example, ask a client a series of predetermined questions. Depending on the answers to these questions, the system might then propose a course of action. For example, an individual might be considering saving for his or her retirement. The system might begin by asking about any short-term needs or outstanding debts. It might then ask the client whether he or she has basic protection policies (such as life insurance) in place, as well as details of the client’s current income and objectives in retirement.

While there are currently offerings which provide clients with information about investment alternatives and filter their decisions (via decision trees or similar), it is not yet obvious that robo-advice has reached the level of sophistication required to provide advice on more complex investment needs.

Although robo-advice makes it easier to pick and manage investment portfolios, rather than going to a traditional adviser, new regulations coming in in 2018 will make it clear what firms can legally offer. It will make it a lot easier for firms to decide what advice they’re going to provide: traditional face-to-face; a portfolio construction and management tool that leverages technology; or both?

It will be interesting to see how those firms that choosenot to offer robo-advice will respond to the development of the new technology. Will there be pressure to reduce the cost of face-to-face advice, or will traditional advice become increasingly restricted to those with more complex needs and/or larger sums of money to invest?

Watch this short video to learn more about this sector, and hear the expert views of the panel, with more coming soon…



Written by Olivia Bowen