With MIFID II now upon us, I was reminded of this CityWire article from back in August. Back when the new regulation seemed still a mere twinkle in someone’s eye, the FCA took an interest in providers of robo advice and the suitability of said same advice.
If a client ‘told’ a robo adviser that they wanted to ‘save for a rainy day’, for example, then how would the robo adviser react? It turns out that, really, the option was there for the robo adviser to act in a multitude of ways, because the question and answer did not go deep enough.
“The client might express objectives in broad terms,” said the FCA paper. “In such circumstances, the firm’s personal recommendation would need to be suitable for all possible interpretations of the objective. But if some possible interpretations of the broad objective could make the personal recommendation unsuitable then the firm would need to gather further information to support its investment advice. The broad ‘objectives’… would not, [in the FCA’s] view, inform the firm about the (broad or narrow) time period for the investment, the customer’s need to access money over that time or the client’s risk profile.”
This is a significant issue masquerading as a small part of an FCA paper. The challenge being described here, in essence, cuts to the fact that robo advisers are robots, but do not have artificial intelligence. A robo adviser can mimic a real life adviser by asking ‘what’s your investment objective?’, but when faced with a potentially unsuitable answer, it does not have the intelligence to then say, ‘OK, tell me a little more about why that’s your objective’. A robo advice receives predefined data and provides one of a set of predefined answers. A good adviser explores until they have all of the right data to give the right answer.
This is, in many ways, good news for advisers. Robo advisers are not (at least… not yet) good enough to do everything that you do when you sit face to face with a client. Given that fact, it’s incumbent upon advisers to point this out to clients and potential clients. The limitations of robo advisers are there in black and white and drawing client attention to this both helps your proposition and the IFA’s regulation of robo.
Of course, your case and the FCA’s are helped further by highlighting the fact that your proposition potentially includes the best of both worlds. If you are a Hubwise user, for example, then your proposition clearly rests on your personal guidance, but behind that is a wealth of technology, putting the ‘robo’ into your advice. Our automatic portfolio rebalancing, for example, rests on advanced ‘robo’ intelligence, which takes an important task and applies a plethora of extra data to it in order to achieve the right result at the right time.
Advisers, then – human ones – hold the cards in their proposition to help the FCA to ensure clients are not given potentially unsuitable advice. But the responsibility clearly does not rest solely with advisers. If the FCA’s concerns persist over the suitability of robo advice, based on generalisations, rather than hard facts, then they must step in to take more drastic action than we have hitherto seen. The profile of a robo advice client is typically different to the profile of someone who would use a human adviser. There will be crossover, which is the area where advisers can help, but the FCA must address the balance. Unsuitable advice is unsuitable advice, whether delivered by a robo adviser or human adviser and the consequences of each must therefore be similarly robust and similarly applied.