Since the introduction of the Retail Distribution Review (RDR) in 2013, the costs of providing financial advice have risen which is leading to an “advice gap” between those who can afford to plan their financial future in detail, with expert guidance, and those who cannot.
With the abolishment of commission, upfront fees have to be charged and there is less ability for cross-subsidising fees across clients. This has meant that, for example, someone wanting to set up a monthly savings plan might have to pay 6 months’ contributions upfront as an advice fee – which doesn’t feel affordable to many.
The industry is therefore looking for solutions. Robo-advice is one area that potentially offers a way for members of the public to set up investments via an automated on-line advice process.
Will this “one size fits all” approach work?
For simpler cases, it may do. However, most robo-advice platforms are simply providing portfolio management – i.e. initial asset allocation and rebalancing, which is no match for a full review with a financial adviser offering cashflow management, income protection and life cover, retirement and estate planning, tax considerations etc.
This means that the term “robo-advice” is really a misnomer, which could mislead the public, as no advice is taking place – it’s more of an execution-only type arrangement and deals purely with investments and does not provide access to other wrappers, for example pensions.
The customer is simply going through an online process to end up with a (hopefully) suitable investment portfolio at the end. It should be noted that providers such as Aviva have provided the ability to apply for e.g. a pension online via a decision-making flowchart, for years.
The online process will select investments based on the investor’s capacity for investment risk and loss, age and other factors, such as income and objectives. However, the person is at home, making these decisions alone. In my experience people are more likely to act if they have entered into a process whereby they feel committed and with someone who can hold their hand during the decision making and application process. Sadly, this is a service most financial advisers can no longer provide for smaller investors.
In terms of risks, the companies are not making personal recommendations, and so the investment strategy outcome might not actually be the most appropriate. The investor runs the risk of not providing correct or sufficient information, and because this is in effect an ‘execution only’ service, the individual is responsible for their own decisions.
So, whilst the firm will be regulated by the Financial Conduct Authority, all this means is that should one fail, the investor’s investment would be covered only up to £50,000 per institution under the Financial Services Compensation Scheme (FSCS). There is no recourse if the investor thinks that they might have been mis-sold the investment strategy, unlike via a true advisory process.
Where does ethical investing fit in?
As well as screening out certain sectors, ethical investing is concerned with investing in businesses which care about their environmental and social impact, with the aim of preserving long-term shareholder value. We believe that companies that take sustainability into account are likely to be more robust over the long-term and thereby perform better.
Ethical funds now have a track record of more than 30 years in the UK and independent research has concluded that ethical funds largely hold their own against conventional funds in terms of performance.
Because robo-advice solutions are aiming to be cheap, many use passive investment strategies, which don’t sit easily with ethical investing. When investing ethically, the best fund managers want to own real assets and engage with the companies’ management team to ensure best practice. It isn’t simply a case of avoiding certain sectors. Although passive ethical funds exist, we consider them to be “light touch” and less meaningful in changing corporate behaviour.
To my knowledge, there have been two specific ethical offerings so far: Bromige’s ExpertEthical and from SimplyEQ, although there may be ethical investment solutions offered by other providers, which are not marketed as such.
In addition, Ethical Investors are aiming to launch a service this year and at Castlefield we have plans to launch some form of on-line simplified advice process. This means that ethical investors should be fairly well represented – however, it will be necessary for the companies active in this area to promote their services widely to ensure more and more people are aware that these solutions exist.
As always, providing data (of which there is much) about how ethical funds perform well against their conventional peer group is always helpful, in order to reassure those new to the sector that it’s a wise financial decision to make.
Informed consumers pressing for change is the best way to encourage the providers of financial services to offer solutions that match their customers’ values – rather than just “business as usual”. If this demand is demonstrated, the amount of money in ethical funds could grow via the robo-advice route – from the bottom up (ie consumer demand) rather than the top down (ie industry led) which has not worked well so far in the UK, as still frustratingly few financial advisers seem willing to embrace values-based investing. This leads me to suspect that many of the conventional robo-advice offerings won’t be asking investors whether they wish to invest ethically.
A great opportunity
On balance, the advent of robo-advice here in the UK could provide a wonderful opportunity for consumers to specify that they want ethical investment; and in survey after survey demand for this has been shown to be high.
For example Castlefield conducted a survey in October 2015 which showed that six out of ten people say that they would like to be offered a sustainable and ethical option when choosing an investment but 60% said that they would not know where to go for advice about sustainable and ethical funds.
We are watching the development of this new industry with interest and it may well be that it matures into something more sophisticated, that can really meet the planning needs of the public – but at the moment it is best seen purely as an investment application and management service.