The Financial Conduct Authority has reported on the state of the UK robo-advisor industry and finds fault on a number of levels, prompting mixed reactions.

Robo-wealth management firms suffer from failings such as not showing that investments suit their clients and aren’t clear enough about fees, the UK's financial regulator has said.

While robo-advisors have seized media and industry attention with their promise of automating parts of the wealth management process – raising the spectre of pushing humans out of a job – the industry is still nascent.

The Financial Conduct Authority issued a report on the sector after examining 10 automated online discretionary investment management (ODIMs) in two stages, with seven in its first review, and three in the second. The watchdog didn’t name the firms it examined, however.

“The service and fee-related disclosures at most ODIM firms in our sample were unclear. Some firms did not make clear whether their service was advised, non-advised, discretionary or non-discretionary,” the regulator said. “Some firms also compared their fee levels against peer services in a potentially misleading way. For example, they compared a non-advised, non-discretionary service with a discretionary service solely on a cost basis without explaining the difference in the nature of the service."

And the FCA’s finding on suitability was also unflattering.

“Many firms offering ODIM services did not properly evaluate a client’s knowledge and experience, investment objectives and capacity for loss in their suitability assessments. Some firms did not ask clients about their knowledge and experience at all, as they felt their service was suitable for all individuals regardless of their investment knowledge and experience,” it said.

Digitally-driven wealth management platforms, which adjust asset allocation and tweak investments based on data fed in by clients, have risen rapidly in recent years. Initially, when the retail and mass affluent market for financial advice was squeezed by the UK’s Retail Distribution Review reforms that took effect from 2013, such “robo” solutions were seen as a way to plug an emergent “advice gap”. Robos fall into “pure” and “hybrid” models, with some eliminating human contact while others retain only some measure of personal contact. In the UK, firms falling into the space include Wealthify, Nutmeg, Scalable Capital, Wealth Horizon, True Potential, and Moola.

The FCA’s observations are one of a number of criticisms about the wider investment sector. Last year, for example, it found that, overall, the UK’s fund management sector lacked transparency, value for money and competitiveness.

Views about robos suggest investors accept these models, albeit with reservations. In December last year, a survey of high net worth investors in the UK, US, France, Germany and Switzerland found they were “very open” towards robo-advisors and willing to allocate a significant share of their assets to them. Data presented in the report by MyPrivateBanking, the Swiss research house, showed that nearly two-thirds (63 per cent) of wealthy individuals would invest more than a quarter of their assets with a robo-advisor.

Other grumbles
The FCA's report noted that while firms offer streamlined advice models to make personal recommendations, some providers lacked adequate fact-finding and “know-your-client” focus, instead relying on assumptions about clients.

“In general, we were not satisfied with the strength of information gathering about clients' financial circumstances. For example, some services failed to request or gather adequate information about customers’ debt and other outgoings. Firms should consider how to improve the amount and quality of client information collected during the auto advice process,” the FCA continued.

“We expect automated investment services to meet the same regulatory standards as traditional discretionary or advisory services. This means taking a proportionate approach to information gathering while maintaining the appropriate level of client protection,” it said.

Nutmeg, one of the most prominent of the UK “robos”, commented on the FCA’s report.

“We share the FCA’s desire to ensure all customers are getting a fair deal and an investment strategy which is suitable for their individual situation and needs. As the online wealth management industry grows, with many new entrants entering the market, we welcome tighter regulation and scrutiny to ensure that all firms are following best practice and delivering services that are in the interest of customers,” Martin Stead, chief executive, said.

"Nutmeg was founded with a mission to empower generations of investors by using technology to make high-quality wealth management available to more people, with a jargon-free and better value service. Our head of financial advice plays a vital role in the design of our risk assessment, financial planning tools, ongoing suitability and monitoring of client outcomes to ensure customers have investments that are right for them,” Stead continued.

Bionic, not robotic
One independent financial advisor group said the FCA’s report suggested that a shift to entirely automated approaches wasn’t viable.

“Robo-advice with no human intervention is unlikely to be suitable for those who need to make strategic financial decisions – how best, for example, to prioritise competing demands on their time and money. At the same time, we must recognise that face-to-face is today beyond the financial reaches of many individuals,” LEBC director of public policy, Kay Ingram, said.

“We believe the balance lies in bionic advice, which combines technological efficiencies with human empathy. Through bionic advice we are making quality advice accessible to greater numbers of people at a more affordable cost, retaining at the same time the important sense checking which only emotional intelligence can provide,” she said.