Robo advice – regulatory risk or removal of compliance burden?
Robo advice remains a contentious issue for many financial advisers, though perceptions do appear to be gradually shifting.
Over two-thirds (69%) of advisers now agree that robo advice has the potential to close the advice gap. A marked improvement compared to less than one in five advisers in 2016, according to research conducted by Prudential. (Source 1)
Despite this positive shift in perception, the majority of advisers remain concerned about the regulatory risks associated with robo advice. 76% of the 101 advisers interviewed are concerned about potential regulatory and compliance risks associated with robo advice, while two out of three worry robo advice solutions may not provide the best advice for clients. (Source 1)
Paul Harrison, Head of Prudential’s business consultancy for advisers, states: “There’s a growing acceptance that robo advice has a role to play but advisers have real concerns about the regulatory impact it will have.” (Source 1)
Interestingly, the FCA holds a more optimistic outlook regarding future risks associated with robo-advice. Bob Ferguson, Head of Strategy & Competition Division at the FCA, commented that a robo model could, “help mitigate some of the risks associated with human advisers and a large salesforce” during his speech at the 2017 Annual Conference on Robo Advice. However, he also highlights that the design of the model is crucial, warning: “A poorly designed model could lead to systematic mis-selling.” (Source 2)
The responsibility of managing the risks associated with robo advice ultimately rests with the firm and its senior management, according to the FCA. Outsourcing the technology to a third party will not reduce this responsibility. (Source 2)
The risks associated with launching robo solutions could prevent advisers from taking the plunge. Sentiment among advisers regarding investment in robo solutions remains divided. 41% of advisers surveyed plan to launch robo solutions, while almost the same amount (44%) intend to avoid involvement in robo advice. (Source 1)
Opinion also remains divided over whether robo advice presents a business threat or opportunity to advisers. 46% of advisers surveyed believe robo advice could help their business grow, while 40% consider it a threat. (Source 1)
Robo advice seems to be here to stay but it remains to be seen which firms will succeed in managing the associated risks to successfully turn this technological advance into a new business opportunity as opposed to a threat.
Source 1: https://www.pru.co.uk/pdf/PRUAG5513.pdf
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All figures correct as at 30.06.2019.