Robots Match Sweethearts Everyday So Investment Suitability Is A Walk In The Park?!

The rise and rise of online dating is a testimony to the faith that we humans now put in technology to provide answers to some of the most important questions in our lives. In this context, the decision to trust robo-advice for an investment proposal that is suitable to an individual’s requirements seems like child’s play when compared to putting one’s romantic hopes in the hands of a machine to provide a match with the next Mr or Mrs Right.

Initially online dating was a pretty crude tool leading to a lot of mismatched dates – the TV advert where an earnest looking chap is paired with a camel because “they both are the same age and love long walks on the beach” is priceless.But things have come a long way and complex algorithmic analysis of a set of about 25 questions can now provide highly targeted suitability matches to ensure that first date is more shooting stars and goosebumps than spitting and getting the hump.

In the same vein, the best robo-advice propositions ensure an investor does not end up with a camel of a portfolio by posing a series of 20 to 30 questions and then meticulously crunching the end results. For the whole process to stack up, the robo adviser’s risk profiling engine must be simple, intuitive and yet comprehensive, to enable the answers to be analysed individually and as a data set to produce an outcome as bespoke to the investor’s specific needs as possible. The lazy logic of averaging out contradictory answers for example is a no no. None of this adds up to a straightforward task and there is already a wide spectrum of competence on how the robo advice suitability requirement is delivered.


The overall area of investment suitability by matching an investor’s attitude to risk and their needs to an investment solution is fraught with pitfalls and has been the subject of reams of regulatory analysis and guidance. Specifically, the million-dollar question is how an investor’s risk level is quantified, profiled and then accurately mapped to the risk parameters of a specific portfolio provided by an outsourced discretionary fund manager. Or to put it another way, how can it be ensured that an investor whom a financial adviser deems to be ‘cautious’ is best served by the ‘cautious’ portfolio of a discretionary fund manager?

In the traditional financial advice model the adviser/DFM responsibility split can be somewhat grey when determining which pieces of the suitability puzzle the adviser is responsible for versus the investment manager providing the portfolio. This has led to widespread well documented problems where the ultimate needs of the investor fall through the cracks. As a result, it has not been uncommon for an outcome that has tended towards a ‘one-size-fits-all’ which has in turn led to mismatches in suitability. This problem has been firmly in the regulator’s crosshairs for an extended period already.

Suitability also goes very much to the heart of robo advice by definition. On the one hand Robo advice removes a potential trap where the risk determination of an IFA has to be mapped to the risk parameters the DFM. Because the investor is directly plugged into the portfolio provider’s suitability questions then a mismatch where the suitability defined by an IFA is ‘lost in translation’ is eliminated. Any ambiguity on whose responsibility suitability rests with is also resolved.

It should very much be noted that the lack of an IFA in the equation removes the ability for the human touch of an experienced adviser being able to interrogate with the investor their answers in context of what the IFA knows about their client’s circumstances and refine any answers which are misrepresentative. However, given the fact that the main beneficiaries of robo advice are those who cannot afford the price of traditional advice, and would otherwise be running a DIY portfolio, this could be seen as somewhat of a moot point for that particular segment of the market.

Robo advice done well can provide a very beneficial alternative option to the traditional channels through which investors can access investment expertise. But this blogger’s enthusiasm is tempered by a note of caution –as ever the devil is in the detail on the selection of the robo advice provider. There will be robo advisers who nail their suitability but there will be others who won’t get it quite right in their desire to ensure their proposition is as easy to interact with as possible by the end investor user. Therefore the ability for consumers to have access to a level of comparable transparent due diligence to aid in their decision making is key.

Additionally the regulators overall endorsement of robo advice as a solution to some of the advice gap problem is admirable but this needs to be backed up with a rigorous set of rules to ensure the responsibility of adequately policing robo advice best practices in all areas including suitability are enforced. The FCA in the UK for example have recently launched a new robo-advice unit which is to be applauded.

Here’s to the collective prevention of the ‘camel scenario’ in the robo advice space!

Author: Simon Bottle

Simon Bottle consults on Marketing, Product Development, Sales, Client Services and Efficiency Re-engineering projects.

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