Need to know:
- The Financial Conduct Authority (FCA) estimates that there are 16 million people in the ‘advice gap’: those that need financial advice but cannot afford it.
- While the retail distribution review (RDR) made the advice charging process more transparent, it also made it more expensive by raising standards.
- Robo-advice is seen as a solution to the gap in that it can offer advice through a streamlined process making it more affordable.
Robo-advice is fast becoming a popular method of reaching employees in the workplace with information and guidance as part of a financial education programme.
Robo-advice has been in existence for a few years but it was the retail distribution review (RDR) that prompted a new era in the financial advice industry. Since 1 January 2013, independent financial advisers (IFAs) and employee benefits brokers and intermediaries have been remunerated on a fees basis rather than commission. Until that point, much of the financial education and advice had been provided by intermediaries’ commission, with some employers and employees unaware of how, and for what, they were paying.
Transparency to advice cost
While RDR brought many benefits, it also created a wide chasm between those that could afford advice, and those that were unable and unwilling to pay for it. Jon Bryant, director at Aon Employee Benefits, says: “RDR had many good benefits, transparency being one of them: ensuring clarity around what services are offered and what earnings are going to be had.”
However, it removed the necessity for employers to give employees access to advice and assistance, explains Bryant. “Suddenly an employer didn’t have to spend £100,000 to give member surgeries and one-to-ones,” he says. “The industry is changing, three years afterwards, and will continue to change. Part of that change is robo-advice, the principal being mass customisation.”
The popularity of robo-advice got a further boost this year when the Financial advice market review (FAMR), published in March 2016 by the Financial Conduct Authority (FCA), found that up to 16 million people could be trapped in that financial advice gap whereby they need advice but cannot afford it. Ezechi Britton, co-founder and chief technology officer at Neyber, says: “Automation is a good thing, having these kinds of services in place reduce the costs and can potentially increase the quality of decisions that are made.”
Robo-advice works using algorithms that will interpret data, input by the employer and employee, and create a recommendation based on the individual’s circumstances. David Pugh, managing partner at Lemonade Reward, says: “It uses technology to streamline the process and make it more cost-effective. If [an employer] has a thousand employees going through a certain process, [it has] a brilliant audit trail, and it’s repeatable for the following year in the same process.”
The programmes can give advice on many issues and, usually, employees are asking three questions regarding their retirement, explains Phil Blows, account director at Wealth Wizards. These questions are: am I investing enough to hit my retirement objectives?; am I doing this in a tax-efficient manner?; and is it invested in the appropriate mix of funds?
“A 64-year-old, a year away from retirement, and a 22-year-old just out of university don’t want to be in the same investments,” says Blows. “We would look at doing a yearly health check with an employee so that they log into the system and get advice yearly.”
While a robo-advice system can play an ideal role in providing employees with advice and guidance for pensions investments, it can also play into a wider financial education programme. Britton says: “A lot of the time we’re trying to solve the problem for the [older workers] and their pensions, however, we mustn’t forget the younger demographic as well: people in their early 20s who have no idea what to do with their money.
“They are in a position where the right decisions at that point could have huge potential benefits for them as they get older. Historically, it’s been very difficult for people in that group to get access to quality advice because they can’t afford it and they don’t know who to go to.”
By providing robo-advice alongside other channels that employees already have access to, it will provide better advice at an earlier critical stage, adds Britton.
For some employees, robo-advice systems might be just the start of the journey for financial education, while for others it might offer all the recommendations and information they need. However, the consensus is that that technology is not quite at a stage where employees are confident to act on the advice given by the system alone, and many still want some form of human interaction. Dominic Fryer, head of corporate pensions at Aviva, says: “It remains the case that for big financial transactions, a lot of [employees] still want face-to face reassurance that they are doing the right thing. [With] pensions and some of the complexities that are a result of the pension freedoms, the decision on the route that [an employee] might take, for example, at retirement, is quite a complex decision.”
While, in time, robo-advice might be at a stage where it can interpret an employee’s situation, the human condition is such that when making a big financial decision, people still like the reassurance of getting a response from a human being. However, any system that can streamline the process, cut costs and bring advice to those that would not necessarily have had any, is only a step in the right direction of closing that gap.
Aberdeen Asset Management uses robo-advice to promote awareness of pension changes
Aberdeen Asset Management introduced a robo-advice platform to help employees fully understand the complex pension changes that came into effect on 6 April 2016, specifically the changes to the annual allowance and lifetime allowance for high earners.
The financial services organisation worked with Lemonade Reward to introduce a platform whereby employees could enter their data, such as earnings and pension contributions, and the system worked out what their new allowance and tax bill would be.
Brian Thomson, head of reward and operations at Aberdeen Asset Management, says: “It was built around those changes and we felt that, as an employer, we needed to communicate with people, so we sent out emails across the organisation. We’d kept people up to speed in the run-up as well, in terms of ‘these changes are coming’.”
The online service was complemented with face-to-face seminars and presentations, and employees were also able to ask individual questions of the Lemonade team.
“Even though we are a financial services [organisation], not everybody was fully aware of the changes,” says Thomson. “Some of them are quite complex, especially the annual allowance and the tapering of that. So [employees] were very appreciative of all aspects: the initial communications, the access to the online assessment, and the seminars and face-to-face support.”
Of its 1,500 UK employees, around 400 accessed the robo-advice platform; more than were estimated to be at risk of pension tax charges. Thomson explains that the business reasons behind implementing the platform came down to time, consistency and cost. “We needed something that we could re-use because we don’t think this will be a one-off situation, so something that gives us a strong base to build on and repeat, if we need to, next year,” he explains.
Viewpoint: Robo-advice is designed to help plug the financial advice gap
The size of the ‘advice gap’, the number of people who do not get financial advice, creates a significant risk that employees will seek to remain employed beyond the point where they are productive, because of inadequate retirement income.
Recent moves, such as the so-called retail distribution review (RDR), have raised standards among financial advisers, but also made their services far more expensive; they are now unaffordable to most employees. Emerging automated advice services, sometimes called robo-advice, are designed to help address the advice gap.
Most current services focus on helping consumers with savings decisions before retirement. While some may be offered on an entirely self-service basis, many benefits consultants and pension providers are looking to use these as a first-line offering backed up by human support. Although initially many such services have targeted consumers directly, the cost of attracting customers has meant that increasingly these offerings are being provided by traditional corporate advice and benefits firms.
Many of the early services are presenting guidance to individuals on taking financial decisions rather than formal advice. While guidance can still be beneficial to employees it lacks the statutory protection provided with formal advice, so, while both can be valuable, it is important to understand the difference.
Ian McKenna is director of the Finance and Technology Research Centre