Understanding robo-advice

BRIDGING the so-called advice gap has been a major concern for a number of years now. The ‘gap’ refers to the large number of people who are not seeking financial advice, and who run the risk of making bad investment choices… or simply not investing for their future at all.

Traditionally investors would go and see an independent financial adviser – probably at their office – to talk about their financial goals and the adviser would do the rest. But this service doesn’t come for free, and not everyone can afford to pay for advice.

The continuing need for accessible, affordable financial advice is becoming more of a concern with people living longer and being retired for longer – yet often with very little saved to live on.

This is where robo-advice, already common in the United States, comes in. Getting a robot to help shape your financial future might sound like a no-no compared to comprehensive, tailored advice by a human who can get to know your personal circumstances, needs and goals.

Yet robo-advice can provide access to the complicated world of finance in a cheaper way, which is better than no advice at all in most cases. Using robo-advice you would typically be offered an investment portfolio generated by a computer, following an online questionnaire to identify savings goals and attitude to risk. There are already several versions of this kind of advice available from the likes of Nutmeg, Wealth Horizon and Money on Toast.

There are limits to the robots, of course. Currently, robo-advice can only really cater for an individual whose financial circumstances fit with one of several categories.

One important consideration is that robo ‘advice’ offerings are in fact only investment guidance and suggestions and not tailored advice. This is a bit of a grey area as sometimes the two appear blurred. The crucial difference is that there is no consumer protection if you don’t get regulated advice.

Where there is regulated advice (which comes under the watchful eye of the City watchdog, the Financial Conduct Authority) consumers have the right to claim compensation should they be mis-sold an investment. There is no such protection for those who have bought an investment under robo-advice.

Currently robo-advice in the UK is a relatively small market, with recent reports stating that robo-advisers cover less than £1bn of assets in Britain. It’s going to be a case of watch this space.

Article is accurate at date of writing.