Simon Bottle - Robo Advice - Suitability

1. Simon Bottle Robo Advice Suitability – Can We Learn A Thing Or Two From Internet Dating? The stratospheric success of digital matchmaking services highlights the reliance we have developed ontechnology to provide assistance in the most personal and important areas of our lives. Financial health, whilst being lesstouchy feely than matters of the heart, is alsocritical to ourwellbeing and robo advice is doing for wealth management what internet dating does for those seeking romance. At it’s inception, online dating deployed more scattergun and less rifleshot approach for Cupid’s arrow which resulted ina plethora of awkward first and last dates. But since the early days the service has improved exponentially and the science behind the process leverages alevel of quantitativerigor that requires MIT type boffins to to take the simple (responses to a set of intuitive questions), apply the complex (algorithms that can analyse billions of pieces of data) and produce the simple again (the best match).It’s not hard to see the parallels with robo advice which does exactly the same but with different questions/data. Whilst this all sounds relatively straightforward, it would be misleading to assume this is the case and there is a significant variance in how well different robo advisers solve this equation.The is often tension between the conflicting drivers of user interface and experience versus a process that is detailed enough to ensure the output is fit for purpose to accurately select a portfolio bespoke to the investor. Suitability is clearly not a new challenge that robo advice is the first to face. Suitability as a concept has always been at the heart of the wealth management process whether this be in context of IFAs building portfolios for their clients or outsourcing to discretionary fund manager (DFMs). In the scenario where an adviser outsources the portfolio management to a DFM, the suitability process which requires matching an investor’s risk characteristics to the portfolio best placed to meet their needs has also been somewhat of a can of worms with a concerned regulator involved in the problems.The possible banana skin is a mismatch between the risk assessment outcome an adviser conducts when overlaid onto the DFM’s risk ratings of their portfolios. There is a handover which has to be absolutely spot on to prevent this undesirable outcome and which has historically proven to be a weak link in the chain. Matters have not been helped by a lack of clarity on what the IFA and DFM are responsible for respectively during this process. This has often resulted in an ‘any colour so long as it is black’ type scenario where investors are in the main herded into the same portfolios. Robo advice eradicates the risk of confusion between the IFA and the portfolio manager because there is no requirement for an IFA to communicate the suitability information. This clearly means that the investor is on their own when it comes to the answering of the questions as they will not have an adviser handholding them through the Q&A. However, given the fact that a big chunk of the adopters of robo advice are those unable to foot the bill for face-to-face advice, this becomes less of an issue.

2. Robo advice has the potential to be a transformative force for good if it delivers on the promise of providing institutional quality investment expertise to those currently unable or unwilling to access existing wealth management channels. But it is mission critical that in picking a robo provider, the suitability process is put front and centre to ensure there are no nasty unintended consequences in the allocation to the portfolios. Regulators need to play their part by continuing to supportthe realistically credible contribution robo advice can provide in the remediation of the advice gapproblem by providing a supervisory framework that encourages best practices specific to the robo space.