Are we sleepwalking into a Robo-Advice nightmare?

Are we sleepwalking into a Robo-Advice nightmare?

In the midst of the current industry debate about the pros and cons of Robo-Advice is there a potential nightmare scenario that hasn’t received the attention it should? Namely, that with Robo-Advice you risk creating a system of automated mis-selling.

The ‘classic objection’ to Robo-Advice from many advisers simply states that human interaction is essential to effectively tailor the advice you’re giving to meet the different needs of individual consumers.

But potentially a much bigger issue is this:  if you embed the wrong algorithm in your Robo-Advice system, you face the possibility that the whole ‘assembly line’ goes wrong. The result of which could be that literally thousands of people are mis-advised before it becomes clear that something is amiss.

Of course, advice systems that didn’t depend on an algorithm have also gone wrong, often quite spectacularly, in the past.  But clearly, the very aspects of ‘Robo’ technology that make it so attractive to the industry also throw up this potentially devastating potential weakness.

The comparison site standpoint

In Space’s recent Money Talks interviews, Michael Ward, MD of financial services comparison site payingtoomuch.com articulated this crucial issue very clearly:

 

As you can see, his concern is that, under the current regulatory setup, firms could find themselves mis-advising their customers and racking up redress and compensation bills for huge numbers of customers.

As a result, Michael remains in the sceptical camp when it comes to comparison sites offering automated services – or at least those that claim to offer advice.

As he says in our interview, “Most comparison sites have to make money and they are looking to reduce risk. There is an inherent risk of whether the advice is good enough and what happens if we end up mis-selling to thousands of people simultaneously. I think comparison sites will keep away from it.”

Should we simply channel customers to advisers via automated guidance?

Although Michael has many doubts about advice, he’s more optimistic about an automated guidance service that simply channels customers towards more traditional face-to-face advice.

For robo-systems to be deeply involved with actual advice, Michael believes there would need to be a significant change to the current regulations.

Robo-Advice: the view from Space

From Space’s point of view, we think it clearly remains imperative that firms make sure their systems are airtight. And, as other panellists argued during the Money Talks session and interviews, firms need to put their brand behind all types of advice – mechanised or otherwise – and understand the implications of doing so.

Those looking for some regulatory leeway may also be interested in seeing what exactly the FCA’s regulatory sandbox and the promised advice unit can offer by way of protection, and whether the developing thinking on automated or streamlined advice offers a solution.

In light of Michael Ward’s comments it will also be interesting to see how other comparison sites position themselves once we get the full picture.

You can watch highlights of the full Space Money Talks Robo-Advice debate and all the one-to-one panelists’ interviews on our YouTube Channel.

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