I was quoted in The Telegraph today, in an article about the risks of ‘robot advisers’.
This is topical in the world of retail financial services right now, as the Financial Conduct Authority (FCA) recently launched Project Innovate which is designed to help make technology innovation work for customers and advisers.
Many argue there is an advice gap to fill; the gap between demand and need for financial advice, and the capacity in the market to deliver services.
We don’t subscribe to this view here at Informed Choice, instead believing there is a product sales gap, as plenty of capacity for quality independent financial advice exists for those individuals who need and can afford it.
Regardless of semantics, many advisers already use technology to assist them with the delivery of suitable investment advice.
Within this firm, we licence a number of sophisticated software systems, giving us access to comprehensive research facilities and number crunching that is beyond the scope of an Excel spreadsheet.
One piece of software we have used for a number of years is Dynamic Planner, provided by Distribution Technology. It was this software that was the focus of the article in The Telegraph today.
We use Dynamic Planner for a couple of things; the analysis of attitude towards investment risk, and for access to their specialist investment committee.
What the article does a good job of explaining is that risk profiling systems, such as Dynamic Planner, can never be perfect.
The academic research which supports this risk profile questionnaire (we use the more detailed 20 question version, whereas the Telegraph article referred to the 10 question variant) demonstrates it has a reliability of 92% when it comes to predicting attitude to risk.
In practice, we find that more than eight in ten of the risk profiles we analyse for clients are finally agreed at that level following a detailed discussion between the client and their adviser.
And this is what is really important about technology when it comes to investment advice; it is only ever a starting point.
The initial risk assessment reports we produce for every client are designed to provide an initial assessment of risk (as you might have guessed from the report title) and act as a discussion document.
Importantly, where the Dynamic Planner risk profiler identifies an inconsistency in the answers given to any of the twenty questions, the system flags this up and we highlight it in our reports, for further discussion to make sure the client understood the question.
Where risk profiling systems are used in this way, they are invaluable.
They introduce an element of science to the art of investment advice. They help advisers to better analyse attitude towards investment risk and have a worthwhile discussion about how much risk an investor wants, needs and is able to take.
The link between risk profile system results and suggested asset allocation models is also worth mentioning.
This is another feature of the Dynamic Planner system and one we choose to utilise within our initial risk assessment reports.
We show each client what a suitable investment model for an investor with their initial risk profile looks like. They aim here is to present one of a series of ‘efficient’ asset allocation models (judged as delivering the best potential rewards for the level of risk, as measured by volatility, being taken) to illustrate what that level of risk looks like.
As with the risk assessment, this is a starting point for further discussion.
It gives the adviser an opportunity to show each client what a given level of risk looks like in terms of the types and mix of investment assets in which they would invest. This helps bring an abstract notion of ‘risk’ to life.
Technology used badly, without proper understanding or detailed discussion of its potential shortcomings, is an unfortunate and hopefully minority aspect of our profession.
When used properly, as a starting point for further discussion, risk profiling from Dynamic Planner and other technology providers turns robot advice into robust advice.
