Wealth managers split over opportunities and threat of robo advice

Robo advice is a term that arose in the US to describe computer algorithms that offer financial advice. While a number of different business models exist, it generally involves automating many aspects of the delivery of information about financial product selection to consumers online.

According to a survey of 70 UK wealth managers carried out by Vanguard, nearly 40% of respondents said they think robo advice offers "the potential for more efficiency and an opportunity to attract new clients to their business in the next five years".

However, the majority of others, also representing nearly 40% of the total respondents, said robo advice is a "threat to their business", Vanguard said.

Of the remaining wealth managers surveyed, 7% said they do not think robo advice will have any impact on their business, and a further 15% said they had yet to form an opinion on the issue.

Head of wealth for Vanguard’s UK business, Janine Menasakanian, said that despite the mixed views wealth managers "need to consider how to embrace the advantages of technology whilst still emphasising the personal, trust and relationship-based parts of their value proposition".

"The survey findings show that wealth managers need to consider a range of operational, regulatory and investment issues to ensure their value proposition remains relevant and compelling," Menasakanian said.

Figures obtained by Out-Law.com, first revealed last week, show that there is appetite in the market for greater regulatory clarity on the use of robo advice solutions.

Since launching Project Innovate in autumn 2014 up until 19 August this year, the Financial Conduct Authority received 39 requests from companies for assistance on how to implement robo advice systems, technology or services via its Innovation Hub – the main mechanism the regulator has so far developed to help support innovation in financial services.

Financial services and technology law experts John Salmon and Luke Scanlon of Pinsent Masons, the law firm behind Out-Law.com, said that the FCA should be commended for operating a "doors open policy" on innovation, and said further changes to the regulatory approach can help support the automated advice market in the coming years.

"Firstly, there needs to be a rethink about how the issue of the output from automated advice tools is classified," Salmon and Scanlon said in an article prepared as part of Out-Law.com's 15th birthday celebrations. "The discussion should be moved on from whether the output constitutes information, guidance or regulated advice."

"There will never be a bright line separating these concepts and the regulator will never be able to tell businesses definitely where the thresholds lie. Regulation should recognise this and focus more instead on transparency and warnings as consumer protection mechanisms," they said.

"Regulation also needs to address how to stop the risk of clients failing to provide robo advisers with sufficient information to use the tools appropriately. It is impossible for human financial advisers to provide effective investment advice to clients that do not disclose their appetite for risk and other necessary details to help in the provision of regulated advice. Software and systems are becoming smarter, but they rely too on data to produce an output. This should be reflected in the regulatory regime," Salmon and Scanlon said.