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Robo-advice: is low cost pensions advice possible?

PMI News – July 2017 – www.pensions-pmi.org.uk

With many investment offering launches from big banks on the horizon, and the first retirement-focused propositions being launched now, the focus is back on robo-advice. Financial advisers will have a role to play for the foreseeable future, and face more demand for their services. The opportunity is there to take advantage of this growth through ‘bionic’ rather than robotic advice propositions.

With growing research evidence of changing consumer behaviour, including changing attitudes to financial services, consumers are increasingly looking to financial professionals to broaden their propositions and offer more digital services. The ‘advice gap’ means there is pressure on regulators and government to make financial advice more accessible, and if possible affordable.

It is now widely accepted that if advice firms can provide lower-cost propositions, there appears to be a significant market for them. Including for the pensions market.

A challenge for advice firms is how to service a greater number of possibly smaller clients without adding a disproportionate level of fixed cost, reducing the quality of experience or adding greater levels of business risk to the advisory firm.

The right robo-advice proposition has the potential to do just that.

It is now widely accepted that if advice firms can provide lower-cost propositions, there appears to be a significant market for them. Including for the pensions market.

The involvement of robo-advice in the pension space has mostly, so far, been limited to predominantly transactional Self Invested Personal Pension (SIPPs) investment. However, robo-advice is now starting to enter the wider pension space, with one new launch claiming that it will give full retirement advice in under two hours, and simpler, structured questionnaire services leveraging the infrastructure built to handle payment protection insurance (PPI).

Keeping pace with change

Technology providers and large financial institutions have spotted this opportunity. They believe they can deliver the solutions the market needs via advisers, or directly for the simpler cases and more confident consumers.

However, the issues faced in retirement are so much more complex than the question of how to invest spare cash that currently dominates the robo-advice space.

Most robo-advice systems will look at the client’s attitude to risk and capacity for loss, but when it comes to retirement the issues are more diffuse, and not entirely reducible into the terms of a financial planning forecast.

Can a robo-advice proposition consider the client’s tax position, spouse’s pensions and dependent’s benefits, the client’s health, if they have any other money purchase or defined benefit pensions, and all the other issues that a good adviser will bring into consideration? Crucially, can they detect the nuances within a relationship that will condition family priorities and goals in later life?

The Financial Conduct Authority (FCA) appears to have some concerns on this front. It has attempted to address questions around how firms establish clients’ attitudes to risk when it comes to more complex or higher-value investments through robo-advice services in its latest guidance consultation on the Financial Advice Market Review (FAMR).

Whilst at the moment it is hard to imagine a robo-advice proposition having the depth and breadth needed to offer the same kind of support that clients can receive via traditional advice, Advisers should not dismiss the use of this kind of technology out of hand. The recent victories of the Google Artificial Intelligence system, AlphaGo, over Korea and China’s best Go players is another hint at things to come.

But for now, advisers can make sure their skills, experience and know-how aren’t discounted in favour of the low-cost, high-volume, robo-advice only players that are emerging and aggressively chasing market share.

Many people are now used to communicating with companies online, and expect to be able to do the same with their financial service providers. Also, price discovery online is becoming second nature to all of us.

In its current guise, automated advice is perfectly positioned for those people who have simple investment needs, or who are not looking for a holistic financial review. It can offer a personal recommendation, which differentiates it from self-select or execution-only strategies. But this does not mean that the same, or similar, technology cannot be utilised in the retirement space.

Keeping the human touch

We are concerned that the term robo-advice implies there is no role for human interaction when shaping propositions powered by this kind of technology. Innovative and intuitive client engagement technology, combined with a robust and proven investment proposition, can help advisers scale their business by increasing the amount of adviser time available to interact with clients. A service offering unique to each and every client, tailored to their individual needs, is possible using consistent and repeatable processes.

Whilst recognising that some clients will, of course, be happy to go through the pension advice process exclusively online when the right technology is in place, others will be seeking guidance and reassurance at certain stages of the process. No one has yet launched an online tool which two people can use at once to harmonise their life goals and financial priorities.

We are concerned that the term robo-advice implies there is no role for human interaction when shaping propositions powered by this kind of technology. Innovative and intuitive client engagement technology

We do think it is possible to blend smart technology with different degrees of human interaction to create bionic rather than robotic advice. This gives the client control over the level of personal engagement and automated processing that they feel is best placed to meet their needs. For example, technology can quickly assimilate the key personal and investment variables conditioning a client’s situation at retirement and then illustrate some of the possible strategies to achieve their goals. That creates a moment of insight and rapport between client and adviser, who can take the process further, by working through the soft facts to arrive at a properly suitable set of recommendations.

This approach allows advisers to create multi channel businesses that are genuinely designed with the consumers’ needs in mind.

At Parmenion, as a fintech company, technology is obviously a very important part of our business. However, even for us, technology is just part of the customer journey and service, and not necessarily a whole separate journey in its own right.

Horses for courses

Developing a truly multi-channel proposition gives both new and existing clients a choice as to how they engage with you.

Equally, there is the clear potential for robo-advice technology to streamline the process of reviewing investments and tracking progress against objectives, and delivering the management information to drive the firm’s commitment to delivering good customer outcomes for all its clients.

All in all, enabling client choice is a strategy that allows firms to both grow and retain relationships.

Robo solutions will undoubtedly have a role to play in creating new ways to access the adviser, but they are not the only answer. Perhaps the key factor is accepting the insight that the wave of interest driven by defined benefit (DB) transfers and the rise of the defined contribution (DC)-only retirement are subtly changing the needs and profile of the ‘typical’ client. Firms which adapt fastest to this dynamic look set to share in a future that will be highly rewarding personally, professionally and commercially.



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