Wary Investors Worry about ‘Robo-Advice’
Since the emergence of computers in the 20th century, advances in technology have played a major role in changing the way we do things, including the way we make money.
These days, we have what investors call Robo-Advisers. Do not fret about the name; there is nothing metallic about these advisers. These are basically software programs created to make investment decisions for investors. How cool is that-knowing that you now do not have to pay expensive fees for investment advisory?
Robo-Advisers are only beginning to gain popularity in the UK, but in the US, it’s a common term. Robo-Advisers work by providing investment advice to investors based on their individual profiles. Tired of getting that template advice from your investment manager at a premium? Robo-Advisers are developed using complex algorithms that take into consideration various investing factors which may affect an investor’s decision.
Units Established for Robo-Advice Firms
Last year, UK’s financial regulators discussed in depth about the subject of Robo-Advisers and the FCA (Financial Conduct Authority) recently revealed that it will set up a specialised unit for Robo-Advice firms.
This move was confirmed in the regulator’s recent annual business plan; it revealed that it had accepted recommendation by the FAMR (Financial Advice Market Review) to develop a specialised unit for firms interested in launching Robo-Advice platforms.
Since last year several investment advice firms have launched Robo-Advice platforms while banks are also believed to be showing real interest in Robo-Advisers. This paradigm shift has not escaped criticism from wary investors as some worry about the risks involved in using such a platform to cater for their investment needs.
These fears were recently echoed by FCA Chair John Griffith when he said that the regulator was fully aware of the risks and potential rewards of Robo-Advisers.
‘Technology can drive down the cost of accessing products and services, and can push up the quality of service,” said Griffith, commenting on FCA’s recent annual business plan. ‘But it can present challenges to markets and regulators alike, including resilience, cyber-crime and financial exclusion.’
Not a Replacement for Comprehensive Investment Advice
This also implies that while costs are bound to be lower on Robo-Advice platforms, it would be premature to assume that Robo-Advisers will replace traditional investment advisers in their entirety.
As such, investment advisory and management firms like Fisher Investments UK, which primarily deal with wealthy investors, will still be very important because they offer professional advice that cannot be put in an algorithm.
This can be in the form of extended experience in the market as well as varying opinions from the advisory team. Therefore, Robo-Advisers can do some of the things that traditional investment advisers do, but they certainly cannot do everything.
With Robo-Advice, an investor fills in to the platform certain details about his/her investment profile including age, investment income, annual income, and risk appetite, among others from which the system draws conclusion on the best investments for the individual. As such, you could say that Robo-Advice works pretty much like WebMD, where patients input their health/injury profile to receive guidance on potential treatments. However, you never really get a prescription.
The same thing applies to Robo-Advice, the information you provide is used to generate leads on investments opportunities, but it never really invests on your behalf.
Conclusion
In summary, there are genuine concerns about the reliance on Robo-Advisers, but given the fact that these platforms are operated by fully regulated firms, it means that investors can at least be comfortable with their authenticity.
However, it is also good to note that Robo-Advice cannot be taken on face value and then directly implemented in an investment portfolio. Investors need to take into consideration all factors that may affect their investments decisions including those that cannot be put in a Robo-Adviser algorithm.