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Robo-advisers no silver bullet says SCM Direct


SCM Direct has conducted research into robo-advisers and reports that they may not be the ‘silver bullet’ the FCA and Treasury are hoping for in terms of bridging the advice gap. 

The firm believes that they may well create more problems than they actually solve.  The report, entitled Fintech Folly – The Sense and Sensibilities of UK Robo Advice, found that UK robo-advisers are ‘wired’ to lose money, and may go bust before ever acquiring the sizeable assets under management required to ensure their sustainability.
The research findings within this report estimate that the average UK robo-adviser receives revenue of just GBP147.50 pa per account, but the cost of acquisition is at least GBP180 pa per account; plus, considerable additional annual business costs.  SCM writes that these additional recurring costs, even if they ever achieved the same economies of scale as much largest competitors, amount to GBP130 pa per account.  “Thus it costs them GBP180 to make just GBP17.50 net each year. One well known UK robo-adviser firm reported costs in its latest available accounts of GBP9.42 for every GBP1 of revenue.
SCM Direct estimates that an average UK robo account would need to be invested for nearly 11 years to reach profitability. However, research findings show the average holding period for a robo-adviser client may be just three years, the firm says, partly the result of many targeting the younger, ‘millennial’ market even though they account for just 5 per cent of the investible market.
The firm also finds that financing fatigue is likely as demands for capital injections increase whilst the reported growth rate from large US robo-advisers has decreased to just one third of the 2015 growth rate.
In terms of regulatory issues, the report finds that many firms appear to be straying into giving advice without possessing the requisite regulatory permissions or following the appropriate regulatory procedures.
SCM writes: “Evidence from a sample of ten UK rob-adviser firms reveals misleading performance illustrations, questionable statements regarding fees, a reliance on risk questionnaires, missing pages of key legal documents, and questionable claims. 80 per cent (8 out of 10) of websites use risk questionnaires but 25 per cent of these firms (two out of eight firms), did not possess the regulatory permission to give advice to retail clients.   This would be a material regulatory breach were either the FCA or the FOS (Financial Ombudsman Service) to deem such services to be advice.”
SCM concludes that the findings of this research report leads them to believe that the FCA needs to urgently apply the brakes and systematically review this nascent sector.  “But instead they announced on 5 July 2016 that they are setting up a robo-advice unit and allocating it GBP500,000. In the US, the Massachusetts regulator has recently warned that robo-advisers may not be able to deliver ‘appropriate’ investment advice as there is no checking whether the information given by clients via electronic questionnaires is accurate.
“The Secretary of State for Massachusetts, said; "Entities that create computer-generated portfolios but fail to do the necessary due diligence to know their customers and who specifically decline most if not all the fiduciary duty is not performing the duties of investment advisers."
The firm writes that their research into ten UK robo advisers should prompt the FCA into conducting a thorough review, before rather than after the stable horse has departed.
“Innovation and evolution is vital for any sector to remain competitive and ensure they are offering the best customer outcomes, but it should never be innovation purely for innovation sake but at a medium to longer term cost of not properly protecting the client.  The overarching principle of Treating Customers Fairly (TCF) must always apply rather than be temporarily suspended by firms and the regulator for political expediency,” the firm says.
Gina Miller, co-founder of SCM Direct and the True and Fair says: “Our conclusion is that there is little evidence of robust innovation, as new robo-advisers appear to be fundamentally financially unviable and/or seem to be regularly flouting key FCA rules.  It’s time the FCA to step in and protect consumers from the various issues raised in our report, which their US regulatory peers are already addressing.”
The SCM report can be found here.

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