The FCA and government are concerned about the availability of financial advice. Michael Klimes asks if robo-advice could be the solution.
- With millions still to be auto-enrolled there is a need for financial advice which is out of reach for many
- Employer facilitated robo-advice could plug the gap but it is untested and raises scepticism
With millions of people yet to be auto-enrolled and the age of pension freedoms still being entrenched, there is an "affordable advice" gap. Many in the general public cannot afford advice and even if they could there is no certainty they would pay for it.
The government and regulators have recognised the dangers of this situation with HM Treasury and the Financial Conduct Authority (FCA) launching a joint review into consumer access to the financial advice market.
The Financial Advice Market Review (FAMR) has been set up to improve less wealthy consumers' access to financial advice.
Treasury said it wanted to make sure people could access high-quality, affordable, tailored advice and guidance to help them make informed financial decisions. One of its key aims is to consider ways to encourage people to seek financial advice, addressing unnecessary barriers that currently deterred them.
So given that many people still need direction when it comes to taking retirement decisions how can this situation be resolved? According to some, robo-advice could be the answer.
Automated advice - provided by so-called robo-advisers - is a concept rapidly gaining ground in the retail market, particularly in the US. There algorithm-driven advice is already helping thousands of clients to manage their investment portfolios at a lower cost.
So far, the use of such systems is limited in the UK but this could change. Indeed, pensions could be a place for such robo-advice to flourish in the corporate market. Whether robo-advice will catch on and be effective at an institutional level depends on who you to speak to in the industry. There is also a debate about what the term robo-advice actually means. Some say what is called robo-advice in the UK is better understood as robo-guidance.
Buck Consultants head of corporate solutions John Deacon finds the concept difficult for several reasons. He thinks providing advice at retirement is complicated, employers will not want to pay for it and sponsors will not want to be on the hook legally if the advice provided turns out to be wrong.
"We must remember the employer is not there to help the employee sort out their own financial affairs," he says. "To my knowledge there is no legal requirement for employers to do so other than provide the basic information as per the auto-enrolment process."
The prospect of an employer using robo-advice to help someone at retirement fills Deacon with apprehension. "The problem on the decumulation side is that there are a wide number of issues, some of which are complex. That is just an area where employers should not get involved. In order to give people the right advice you need to spend quite a bit of time understanding that individual and that time needs to be paid for," he adds.
He continues: "I think it is a bit of a pipe dream to think we can provide advice in a complicated set of circumstances when someone comes to decumulate. It is a damn sight more complicated than a mortgage where you have to incorporate the individual's particular circumstances."
Where Deacon can see technology being used by employers is in the run up to retirement. Here the collection of contributions is simpler and therefore more open to improvement from automation.
"In the accumulation phase there is a space for robo-guidance but robo-advice would potentially just be a step too far," he says. "Where you are using the word advice you have introduced the concept of culpability. Guidance is a different matter. It is the provision of information to empower people to make a decision."
Wealth Wizards chief executive Andrew Firth disagrees with Deacon. He argues robo-advice is practical, economical and needed. "Our philosophy is that you can do 80% with robot and 20% human," he says.
Firth lays out the difference in cost between a human IFA and robo-adviser. "Our mental model is £100 a year when you accumulate, £750 at the point of retirement and then £100 a year going forward. That compares with an IFA who would probably charge £2,000 to retire and then up to 1% of your portfolio and certainly more than 50 basis points of your portfolio to look after you on an ongoing basis after that," he says.
At accumulation Firth says robo-advice is simpler and therefore cheaper. He also thinks robo-advice in an employer context has some benefits which the retail space lacks. "The advantage of an institutional one is you are probably dealing with something like a master trust," which gives members the ability to access services more cheaply.
Towers Watson senior consultant Stephen Green thinks there is a middle point between Firth and Deacon. He reasons the test of any adviser, whether human or robot, is the need to provide help which is holistic.
He says: "The challenge really is that individuals will often need a full holistic advice service at retirement and that probably goes further than employees want to pay for. Then you get into the remit of simplified or focused advice where you are looking at the existing benefits within that pensions arrangement. It can work as long as you have appropriate flags to identify an individual where it is appropriate for that person."
As people's retirement income decisions become more complex Green believes there is potential for both retirement guidance and advice to be part of someone's entire working and retirement life.
"Through the accumulation stage forms of guidance can be provided to help them make decisions better. At the point of retirement it will then be a blend between guidance and advice," he says.
The next phase is to determine how much the employer would be happy to pay for simplified or focused advice. This could then be expanded in other cases to full holistic advice tailored to the individual.
"An individual spends money on the full holistic advice and the employer spends money on the focused advice. There are an enormous amount of challenges individuals need to face at retirement and the sooner we can do it the sooner we can make the at retirement process significantly better," Green continues.
While some are just talking about robo-guidance, others are actually delivering it. KPMG partner Stewart Hastie outlines what his company is doing: "Our system is called KMPG pilot and that can actually be used to help to reduce the IFA costs as well because it will do some of the fact finding whether the employer or employee is paying for it [advice]. It can help reduce some of those costs."
He believes that one area where robo-guidance can be of real use is partial transfers. "We are seeing a huge interest in it both from a trustee and employer point of view," he says. "I think in particular the idea of being able to keep a bit of the defined benefit (DB) pension but having access to some of the flexibility rather than it being an all or nothing decision. The IFA market, as I understand it, is quite positive about the idea for partial transfers from DB."
The analogy for KPMG is that you do not try to teach a four-year-old how to read by sticking a book in front of them – you have to help them understand how to read. “Why we say education is necessary rather than information is we feel there is the gap between giving information at retirement and getting the advice piece. That is an education gap and technology can play a part in filling it,” Hastie continues.
Equiniti pensions strategy director Paul Sturgess sees technology developing in two ways. Firstly building on what already exists and secondly entirely fresh innovations. He explains the difference and connection between the two. He says: "Robo-advice in the context of providing what the industry would consider advice is unlikely to be provided by any pension scheme in the foreseeable future," he says.
"However, the industry has seen, and will continue to see, major advances in the use of complex algorithms and decision tree processing supported by technology to provide pension scheme members with more tailored information.
"This is not new and underpins existing pension administration platforms. This type of technology has, and will continue to, improve member support, efficiencies and costs. We can expect to see significant advancement in the way scheme members can engage with their personal information and how this could impact given much more complex scenarios. A good case in point will be the management of accumulation and decumulation within drawdown."
Sturgess believes that at some point in the future a virtual advice process - whereby a machine provides a definitive recommendation - will happen. Yet this is unlikely to be the case for pension schemes by virtue of their governance structure.
However, he warns this use of technology will be qualified: "Trustees and employers will not want to be the source of advice however generated. Indeed, from a regulatory perspective this is not something they would have the permissions to do even if the will were there. At most they will facilitate access to bodies that have the relevant permissions."
He adds: "Pension freedoms make the challenge even more significant. A person's ability to consider income streams less certain than annuities is a function of a very wide range of elements covering both the individual and their wider wealth pool with any partners. Advice in this space is complex indeed."
However, the pensions world is always changing and technology will inevitably play its part - according to KPMG's Hastie employers are likely to find themselves having to provide something to their employees.
"There has been a bit of sea change in terms of the support providers and employers need to provide to members. You will be doing a disservice to members if you don't help them. I think we are seeing an appetite and interest and particularly at the retirement end of decision making. Doing nothing in this regards is not risk free."
- Potentially some of the new robo-advice players which will enter the market will be communications providers or broader reward HR type consultancies as well as employee benefit consultancies (EBC) and pension providers.
- To succeed robo-advice has to be engaging. Although EBCs and providers have made strides in this area, input from people with a communications background will be crucial.
- Processes and approaches will be found so people can at least access some form of guidance to help make some decisions as they go along whether it is on drawdown products or anything else.
- Robo-advice will not just look at pensions, it could also look at ISAs and share plans and other services to members.
- The number of DB schemes facilitating partial transfers for members will increase to around two third over the next few years.
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