Robo-advice is a relatively new development in financial advice. You might have seen online adverts; they pop up now and again (usually on certain social media sites) often offering a cheap and easy way to build an investment portfolio and meet your financial goals. The attraction is a fast, cheap advice process that can be completed from the comfort of your own home. In the past robo-advice has been billed as the future of financial advice, and a threat to the traditional advice process.
I recently attended a financial services presentation where one of the speakers chose to talk about robo-advice. He started by pointing out that robo-advice is a complete misnomer. Firstly, it has nothing to do with robots; instead it uses computer algorithms to automate the advice process. And secondly, it has very little to do with advice; the aforementioned algorithms generate an investment plan without any accompanying advice.
In short, robo-advice encourages the investor to cut out the expensive, time-consuming advisor and arrange their own investments. Of course, that’s not going to be a very popular concept with financial advisors. But I think it’s important to research advice alternatives (or know one’s enemy) - so I decided to put the robo-advice process to the test.
I chose 3 different sites and entered my personal details. I might have been a little economical with the truth about my investment experience (although none of the sites offered the option of financial professional). My objective was to save for my retirement and I chose an adventurous (i.e above average to high) risk profile. If I was making a recommendation, I’d advise myself to maximise my pension savings in higher-risk equity funds. I was interested to see if robo-advice would agree.
The results were varied. Staggeringly, one site didn’t recognise my retirement planning objective at all; it advised me to save in an ISA not a pension. Further research showed that pensions simply aren’t an option on that site - which is worrying, given there was no indication that I would be given limited advice. Also, there was no mention in the auto-generated documents that I could access a more suitable investment elsewhere. So a massive fault to start with: robo-advice doesn’t necessarily make recommendations based on the whole of the market, it’s limited by its own capabilities – in this case, to non-pension savings only.
Thankfully the other two sites recommended that I save in a pension, although one of them also thought I should make monthly savings into a cash ISA. This was completely at odds with my adventurous risk profile, besides ignoring the fact that investment funds achieve far higher growth than cash savings over the long term. The 17-page advice summary document revealed that the cash ISA was to ensure that I had an emergency cash fund to access in future. But this site hadn’t asked me for details of existing investments; if it had done it would have known that I already have emergency cash savings. So obvious fault number two: robo-advice relies on far less information than a human financial advisor would require before giving investment advice - so will naturally get some things completely wrong.
Only one site remained, unsurprisingly it was the site that had asked for the most information. Unlike the other two, it wanted details of my liabilities, assets and savings in addition to my income. This site recommended a pension and a stocks & shares ISA; it made a point of recommending the ISA so that I had some access to my savings before I could take benefits from my pension (earliest age for this 55).
The recommendation was factually correct although I personally wouldn’t recommend that someone who wanted to save for their retirement split their savings 50/50 between a pension and ISA. The real problem with this site came with the investments it recommended. While they were mainly equity investments, none of them were as high risk as I would have chosen and nowhere near the risk of my existing ‘real life’ pension funds.
This third site is the perfect example of why an advisor could be so much more beneficial than a computer algorithm. An advisor can explain the differences between pension and ISA savings and qualify the relationship between risk and reward far better than a computer-generated report. Discussing options with a financial advisor enhances an investor’s understanding of their investment options.
Robo-advice is certainly a much more streamlined process than traditional financial advice because it relies on far less information to arrive at its investment recommendations. But therein lies one of its biggest drawbacks – it lacks the ability to analyse an individual’s existing financial affairs and take into account changing circumstances. The biggest attraction of robo-advice must be the low cost, which is no doubt a big draw to lower value savers. The ease of use and accessibility are also unquestionable; but is financial planning of so little importance that you want to make spur of the moment decisions while sitting on the sofa?
So would I advise someone against taking robo-advice? I think it very much depends on his or her financial circumstances. For a young person just starting to make savings, I think robo-advice has its place in the financial advice process. But it should be remembered that robo-advice is unlikely to cope with anything more complex than quite basic savings. And it’s not a long-term fix; once the amount saved reaches a certain level - or the investor has a material change in circumstances - a financial advisor is likely to be the more beneficial source of advice.