End of the human brain? The robot advisers are gearing up
Amidst a raft of new legislation since the financial crisis of 2008, the financial services industry has seen its technology (FinTech) arm boom creating with it an environment of uncertainty in the ever-changing advice sector.
By Joe Woodbury, Director, Investor Management Solutions at Lawson Conner
The FCA recently announced that half of the companies that were involved in the first cohort of its Advice Unit have decided to either launch a low-cost advice service or are planning to do so imminently adding services to an increasingly saturated market. However, despite many businesses offering financial advice not everybody can access or afford it — something that ‘robo-advice’ promises to change. In a bid to close the gap between those who need advice and those who can afford it, the FCA launched its Financial Advice Market Review (FAMR) to investigate the opportunities and the challenges that automated advice can bring and see if it really can work.
Automated advice, or ‘robo-advice’, is the provision of financial advice with as little human interaction as possible. Robo-advice, a form of artificial advice (AI), uses mathematical rules and algorithms rather than human intelligence in order to provide tailored advice. Despite the fact that algorithmic trading has been around for many years, the possibility ‘robo-adviser’ has only recently become a reality.
In October 2014, the FCA introduced Project Innovate in October 2014 in a bid to provide practical support to businesses wanting to introduce innovative financial products and take advantage of this new wave of technology. Firms were invited to join the Sandbox where they could test new products without all the usual regulatory requirements. June 2016 saw the launch of the Advice Unit, a safe place for businesses to provide regulated feedback to those developing robo-advice models. Today, it also accepts businesses not seeking authorisation but wanting to provide guidance on regulation.
To date, robo-advice offerings mainly focussed on the less complex end of the financial advice spectrum. However, the FCA’s purported enthusiasm for these advisers, as previously mentioned, has stemmed largely from concerns about an ‘advice gap’, situations where consumers are unable to get/afford advice and guidance. The FCA, much like the FinTech industry, sees a raft of possibilities in tackling this but also some pitfalls. Still relatively new to the market, this type of advice is generally not yet at the stage where it can provide sophisticated advice in relation to complex circumstances and some external factors seem to be slowing down its much-anticipated fruition.
Many of the opportunities that come alongside automated advice ironically also cause the challenges. Opportunities include: a low-cost alternative to traditional services, an increased accessibility for the consumer (on the basis that the advice/ guidance is based on algorithms it can be accessed 24/7), increased access to affordable advice/ guidance, and many argue that it removes human biases and can provide consistent advice/ guidance. On the other hand the following challenges also arise: using AI will inevitably lead to job losses and eliminate human interaction, how can one draw the line between advice which is regulated and guidance which is not, this advice brings with it an increased risk if the wrong information is inserted by accident — something a human adviser would be able to spot and correct.
The FCA considered these challenges as part of its Financial Advice Market Review (FAMR), and finalised its guidance on ‘streamlined advice and related consolidated guidance’. Since publication in 2017, there have been significant strides forwards in relation to further regulation of the financial services industry: the boundary between advice and guidance has been tightened, the Financial Services Compensation Scheme funding review has been launched, employers have been encouraged to facilitate advice for their employees, a dedicated unit for automated services has been set up, and alongside the Treasury and industry experts, the FCA has been working through the latest long list of reforms facing the financial services sector.
Robo-advice appears to only be automating a small part of a much wider industry and at a relatively restricted pace, despite the aforementioned strides and improvements to technology, in particular in the artificial intelligence space. Like so much in the financial and regulatory technology sectors, it is the collaboration between the technology and the human interaction that makes any AI product a real success. Without this collaboration, the opportunities and challenges that robo-advice bring will not be fixed. At the end of the day, we still live in a world where the human brain is still very much needed and not yet ready to be erased by robots.