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!

Unconvincing Robo Advisers’ Real World Track Record – The Robotic 800 Pound Gorilla In The Room

There are plenty of obvious upsides that a well executed robo advice service can deliver. The elevator pitch is that robo advice can provide professional diversified wealth management expertise to a massive group who are either currently financially unable to afford existing options or who are not impressed enough with more traditional advice to justify making the leap from a DIY approach.

Robo advice can provider lower and more transparent fees, increased simplicity and a proposition in tune with the ever increasing appetite of tech savvy Millennials, Generation X/Y/Z and even Baby Boomer ‘silver surfers’ for the provision of slick efficient technology solutions to meet their needs.

HOWEVER Robo advice is not a wealth management silver bullet. The 800 pound gorilla in the room is a lack of confidence in typically relatively unproven underlying portfolios with limited real world track record. Investors need to feel entirely comfortable with the actual performance over an extended period of time of the specific portfolios their money will end up in including how the thing will stand up to acute and chronic market stress. However many of the robo firms cannot provide this peace of mind because their firm is relatively new.


Cyborg Gorilla

Robo advice firms typically try to address this shortcoming by espousing the CVs of the discretionary teams behind the portfolios or the eggheads who have built the algorithms that power the asset allocation of the more automated robo advice firms.

A significant degree of caution is advisable here. The list of asset managers that have claimed to have previously constructed portfolios that were ‘the next best thing since sliced bread’ as a marketing hook for a new set of portfolios which have then not delivered is long and distinguished.

The obvious remedy for this particular issue is to be wary of “simulated” or “historically projected” performance that show appetizing returns that ‘would’ have been achieved if the money managers had been running the portfolios the robo proposition offers.

There is no substitute for investing into the very portfolios that have an extended real world track record. There are robo asset managers that have managed to eke out impressive annual returns in the actual portfolios that the robo feeds directly into over a period that includes the 2008 crisis. Seek these firms out.

It’s worth noting that in the scenario where an existing financial adviser is white labelling the services of a robo partner provider, then the investor must be able to look through and interrogate the real world credentials of the firm that will actually be making the investment decisions.

Why Should IFAs Embrace Rather than Fear the Rise of Robo-Advice?

Many advisers see robo-advice as a disruptive and potentially disintermediating threat. But robo-advice can instead enhance an IFA’s business model and improve client outcomes.

The answer is founded on the fact that robo-advice is a reality that is only going to get bigger and stronger which means that trying to turn back the tide King Canute style is not going to work. Far better to take advantage of this development as a revenue generating opportunity that can also improve client service.

For IFAs, the blending into their existing service mix a complimentary robo-advice type service can provide some very attractive benefits. It provides a viable solution, blessed by the regulators, for the ‘advice gap’ and so called ‘orphans’ who are not commercially viable as IFA clients in the traditional model.

Additionally a Robo-advice offering can offer a scalable entry point for clients many of whom will need face-to-face advice in the future on tax planning, pensions, mortgages etc thus allowing an IFA to compete with the banks in this space on a level playing-field.

The simplest and most cost effective route for an IFA to add a robo-advice string to their bow is to partner with a provider that can deliver a white-labelled full robo package that includes the technology and the underlying investment management prowess and track record. More on that in a future blog!

It’s worth pointing out that robo-advice is not necessarily just for those with a smaller nest egg. Many wealthy investors are keen to minimize the amount of fees that an investment portfolio costs per year as part of their approach to maximise overall returns achieved over time. These type of investors would typically be laser focused on maximizing the positive impact of the magic of compounding which they see as diluted by every pound that is extracted. An IFA offering a robo-advice proposition is able to provide a genuine solution for those looking for the most cost effective way to have their investments managed in a diversified portfolio by expert money managers.

Now is the time to embrace the emergence of robo-advice which gives the IFA a revenue generating USP to deliver to a wider target market a proven track record in delivering medium to long term top quality asset allocation with the aim of growing clients’ wealth over time.