Financial companies, large and small, are trying to grab a piece of the burgeoning digital advice market. Also known by the unattractive name ‘robo advice’, this uses computers to give low-cost financial advice online with little or no human intervention. It could help the huge numbers of people who need financial advice but do not currently receive it.
But digital advice has been strongly criticised recently for having confusing structures and opaque fees. Some also say many digital services are just a cynical attempt by companies to secure money on which they can charge ongoing fees, but are not sophisticated enough to make sure users get the best solution for their needs.
So is digital advice any good?
In the UK up to 5.5 million people need financial advice but do not get it, often because they think traditional advice is too expensive or they do not have time. Digital advice is already starting to fill this gap because it is quicker and easier and you can invest £1,000 or under – much less than human advisers usually need to make it worth their while.
This is why digital advice pioneer Nutmeg, for example, has accumulated 30,000 customers in its first six years, more than half of which are first-time investors. Millions more millennials are likely to use digital advice in future for similar reasons.
However, a study by the Financial Services Consumer Panel says that many digital offerings are failing customers with bad communication, opaque charging, and unclear explanations about recourse to compensation or the financial ombudsman should things go wrong.
Panel chair Sue Lewis says: ‘More and more people with relatively small investments are turning to online services. They need to know exactly what they are buying, what it costs, and what happens if something goes wrong. Most online firms are not giving them this information clearly, and do not have a clue how to communicate in a way their customers understand.’
She added that regulator the Financial Conduct Authority should enforce its rules in this area vigorously before more people who can ill afford it lose out.
What does the future hold?
It is predicted that digital advice solutions will manage $8 trillion assets globally by 2020. In the UK, LV= and UBS have already launched digital offerings alongside specialist providers such as Nutmeg, and many other big brands have plans or are eyeing the market.
UBS only offers investment advice with its digital service SmartWealth, but is working on more complex advice options. SmartWealth co-head Shane Williams says: ‘We use psychological aspects to make sure it is regulated advice not simple guidance. Often digital service charge a fee plus underlying fund manager costs. We display the all-in fee, but many do not. Financial terms can be difficult to understand, but we have educational articles online and review them for complexity.’
Meanwhile, Simon Binney, business development manager for software provider Wealth Wizards, says digital advice is rapidly becoming more sophisticated. ‘Data is becoming much more available from life companies, employers, banks and credit companies. This means retirement advice that takes human advisers seven to 15 hours to compile, we can produce in 30 seconds.’
He also says consumers must be careful, as some firms say they are offering advice when it is not regulated advice, only guidance.
Tim Cooper is a freelance financial journalist.