Robo-advice, also known as ‘automated advice’ refers to the provision of financial advice with as little human interaction as possible. A strand of artificial intelligence, robo-advice offers guidance on the basis of mathematical rules and algorithms rather than human intelligence. Whilst algorithmic trading may have been around for many years, the concept of a ‘robo-adviser’ has only recently become a reality.
This type of advice has the potential to affect all financial services firms as it seeks to provide traditional investment and financial services, both regulated (such as advice) and unregulated (such as guidance), cheaper and quicker than traditional firms.
In a bid to get ahead of this new wave of technology, the Financial Conduct Authority (FCA) introduced Project Innovate in October 2014 to provide practical support to businesses wanting to introduce innovative financial products. Firms were invited to join the Sandbox where they could test new products without all the usual regulatory requirements. The Advice Unit was subsequently launched in June 2016 and provides regulated feedback to those developing robo-advice models. It also now accepts businesses wanting to provide guidance on regulation rather than solely those seeking authorisation. Since announcing that half of the companies in the first wave of its Advice Unit have either launched a low-cost advice service or will be doing so imminently, the FCA launched its Financial Advice Market Review (FAMR) to investigate the opportunities and the challenges that automated advice can bring.
Robo-advice offerings to date have mainly focused on the less complex end of the financial advice spectrum. However, the FCA's purported enthusiasm for these advisers has stemmed largely from concerns about an 'advice gap,' in which consumers are unable to get/afford advice and guidance. The FCA, much like most of the FinTech industry, sees a raft of positivity with the use of robo-advice to combat these issues but also, as always, some pitfalls. Still relatively new, this breed of advice is far from the stage where it could provide more sophisticated feedback in relation to complex circumstances and some external factors seem to be slowing down its fruition.
Many of the opportunities presented by automated advice ironically also cause the challenges. There is a long list of opportunities that include: a low-cost alternative to traditional services; an increased accessibility for the consumer (on the basis that the advice/ guidance is based on algorithms that can be accessed 24/7); and increased access to affordable advice/ guidance. Many also argue that it removes human biases and can provide consistent advice/ guidance. These opportunities also relate to a long list of challenges including whether AI will inevitably lead to job losses and eliminate human interaction, or how one can draw the line between advice, which is regulated, and guidance, which is not regulated. This advice brings with it an increased risk if the wrong information is inserted by accident – something a human adviser would be able to spot and correct.
Since the FCA finalised its considerations of these challenges as part of its Financial Advice Market Review (FAMR) and published its guidance on ‘streamlined advice and related consolidated guidance,’ there have been significant noteworthy strides made in relation to further regulation of the industry. The boundary between advice and guidance has been tightened, the Financial Services Compensation Scheme funding review has been launched, employers have been encouraged to facilitate advice for their employees, a dedicated unit for automated services has been set up, and alongside the Treasury and industry experts, the FCA has been working through the latest long list of reforms facing the financial services sector.
However, despite these many steps forward and improvements to technology, in particular artificial intelligence, robo-advice appears to only be automating a small part of a much wider industry and at a relatively restricted pace. Like so much in the financial and regulatory technology sectors, it is the collaboration between the technology and the human interaction that makes any AI product a real success and the question of whether to adapt today or fall behind the market trends always appears. If considering the use of artificial intelligence, then the following steps should be taken:
- Determine whether the outcome of the robo-advice is actual advice (a regulated activity and cannot be provided without regulatory permission);
- Ensure that during the fact-finding process, any questions used to extract information from the customer are done in laymen’s terms to avoid incorrect answers or misinterpretation;
- Consider using artificial intelligence for a limited purpose. For example, not all customers (especially in these early stages) will be comfortable receiving advice in this way. Simply because the end advice is provided by an advisor, it does not mean artificial intelligence cannot be used effectively.
Introducing any new technology to a business requires specialist expertise. As previously stated, not only is this new way of issuing advice regulated, but it also requires the right human brain power to make it effective. This is a reason why we are seeing—and will undoubtedly continue to see—an increased number of firms outsourcing this function to qualified specialists.