Robo-advice. Possibly the least accurate title the world of financial services has created in recent memory. After all, there are no robots and there is no advice.
Regardless of what we call it (execution-only investment? investor directed platforms?), it is becoming clear that robo-advice is failing investors.
The Financial Services Consumer Panel has published research and a position paper on the consumer experience with online investment and advice services, which are often called robo-advice.
The research was carried out for the Financial Services Consumer Panel by Boring Money.
It concluded that many online investment firms failed to:
-Communicate clearly whether they were providing regulated advice or guidance;
-Disclose costs and charges in a way that allowed consumers to understand how much they would be paying and for what;
-State clearly whether consumers would have recourse to the Financial Ombudsman Service (FOS) or the Financial Services Compensation Scheme (FSCS) should things go wrong;
-Use language that consumers understood.
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The research also found that consumers in the sample did not understand the difference between regulated advice and guidance.
This is an important distinction, because regulated advice comes with lots of consumer protection, whereas the provision of information or guidance does not, leaving responsibility for the action taken in the hands of the investor.
In order to address these shortcomings from robo-advice, the Financial Services Consumer Panel has made a series of suggestions, recommending that:
-The FCA clarifies and enforces strongly existing rules designed to address the problems identified in the research, whether or not regulated advice is being provided;
-The FCA leads an industry and consumer working group to develop simpler, more consumer friendly, language to be used consistently across the sector; and
-The FCA should ensure firms quoting all-in fees are complying with the current rules on costs and charges.
Sue Lewis, Consumer Panel Chair said:
“More and more people with relatively small amounts of money to invest are turning to online investment services, many of them with cash they have released under pensions freedoms.
“They need to know exactly what they are buying, what it costs, and what happens if something goes wrong.
“Most online firms are not giving them this information clearly, most of the time. It is obvious these firms do not have a clue how to communicate in a way their customers understand.
“The FCA should enforce its rules in this area vigorously, whether firms are giving regulated advice or not, before more people who can ill afford it lose out.”
If you are using robo-advice, then make sure you understand its limitation and risks.
There is a place for online investment services which allow investors to make their own decisions with their money.
What we would like to see is more clarity when it comes to the way investors using these services are treated, and possibly a better name for the service which doesn’t mislead its users.
