The rapidly growing robo adviser market is about to come under closer scrutiny from the regulators.
In 1997 the greatest Chess grandmaster of all time Garry Kasparov took on a computer, Deep Blue. It was the ultimate test of the human mind against the machine and, much to Kasparov’s chagrin, the computer won.
It was the first glimpse of how AI could one day help machines to out perform their creators. Today that battle is still raging in the world of finance as traditional independent financial advisors taking on the computer algorithms of the robo adviser.
The market has been booming in recent years. BI Intelligence predicts that approximately 10% of all assets under management will be managed by automated advisors by 2020. Their ease of use and relative affordability, when set against IFAs, make them an attractive option for people who might not have previously dabbled in the markets.
Even more wealthy investors are open to the idea. The BI Research also found that nearly half of high net worth investors would consider allowing robo advisers to manage at least part of their portfolio.
There will be those who insist that humans will beat the advisers at every stage. The ability to tailor advice to an individual’s circumstance and apply your own unique experience to a situation will, they say, give them the edge every time.
Even so, the robots are not going away any time soon which means this is going to be a battle which is played out time and time again. What’s more the contest looks like it’s going to get a referee after the FCA announced it would be comparing the outcomes of IFAs and robo-advisers.
This comes from the Government’s response to the Department of Work and Pension’s report on pensions freedom. One of its key suggestions is that the FCA should assess the different outcomes between IFAs and their automated competitors. The FCA is currently preparing its suitability review which looks at the advice given over the course of 2018 and the signals are that they will be looking closely at the results of the robots.
This will be crucial because while IFAs have come under significant scrutiny from the regulator, the same cannot always be said of automated services. Earlier in the year, the FCA heavily criticised robo advisers for a range of deficiencies. Some were failing to disclose prices or services and clients were not receiving suitable advice. They have required many of the advisers who took part in the report to make significant changes to their business.
The advisers for their part have been keen to defend their model. They argue that such problems are far from unique to robo advisers and can be found with many IFAs. The sector is young and is still evolving as the providers begin to refine and improve upon their offerings.
The regulator has been preparing for the march of the robots for some time. If they are to start comparing the performance of robo advisers against IFAs it will bring a welcome degree of scrutiny and accountability to the sector.