Robo-advisers and the Professional Indemnity market

Financial Advice has traditionally been for the wealthy and the mass affluent, as it is difficult for traditional Financial Advisers to generate sufficient income from other potential clients. As such an “advice gap” has been created.
 

For a long time various bodies have engaged in looking at ways to close this gap, and the arrival of modern day robo-advisers and online financial advice technologies are sparking interest as promising tools with the potential to initiate this change.

Such automated systems can provide individuals who have modest sums the assistance to begin building a savings pot for their future whilst paying reduced fees; an encouraging prospect to the estimated 94% of UK individuals who do not currently receive annual financial advice[i].

There are a number of factors that are driving this opportunity. For example, the government has recently signalled a clear switch from Pensions (and the limitation of lifetime allowances), to generous annual limits for ISAs. There is also an incentive for Millenials and Gen X, now moving through their twenties, who are struggling to save for a house deposit whilst repaying student debts. Robo-advisers therefore present the perfect opportunity to attract those with modest sums and a need to grow their financial resources.

Research also suggests that many younger individuals have adopted on-line advice and are aschewing traditional face-to-face advice. Such technology may be particularly attractive to the younger ‘tech savvy’ generation who have been raised in the digital era and are familiar with organising many aspects of their lives through online banking and apps. Firms utilising robo advice therefore will hope to attract and retain these individuals by helping them to grow their saving portfolios.

From a professional negligence perspective, questions remain about where legal responsibility would fall if the advice given by a robo-adviser results in financial loss to a client. Those involved in the development and installation of these platforms will need to ensure that they are able to gather sufficient data to fulfil their responsibilities in matching products to the client’s needs. The process needs to be robust enough to look at risk appetite and capacity for loss, and herein lays the first issue for firms; balancing the dichotomy between gathering sufficient data but not turning off the potential client. Realistically, it is therefore likely that only relatively straightforward investments (typically maxi-ISAs or similar) will be suitable. There are already successful businesses with on-line propositions for Life & Protection policies, where fewer details are required for a successful sale.

Financial advisers face the on-going risk that a client could lose money at some stage in their investment journey. An on-line advice process will have to consider the following fundamentals in the same way as face-to-face arrangements:
 

• Age of client
• Length of investment
• Risk of investment
• Needs for short term cash
• Paying off debt before investing
   

The FCA has been a strong supporter in bringing financial advice to the wider population using technological solutions, but in April 2018 stated that they had been disappointed with the lack of risk warnings in the products offered.

Insurers will want to look at on-line systems and may, when faced with the underwriting proposition, want to test the access. I would imagine some will make up imaginary scenarios to see how the process will cope.   We suspect that those offerings set-up with good technology but with little input from individuals who have access to or involvement in financial advice may fail to convince an insurer that they are a good proposition.

Firms looking at robo-advice models should ensure that their broker and insurer understand their systems and the risk assessment that was considered before the system went live. And, as an aside, any robo-adviser expecting to be undertaking Defined Benefit Pension transfers will not be an early contender for discounted premium from the Insurance market!

[i] Financial Advice Market Review – June 2017
 

Written by Steve Ray