Response to joint Comitteee Discussion Paper on automation in financial advice
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• While consumers do have ready access to a wider range of service providers using automated tools they do not necessarily facilitate cross border transactions compared to human advice. Investment advice is regulated nationally which makes it impractical to offer such advice to consumers in other countries.
• We believe that it is highly unlikely that consumers may no longer be given the opportunity to access any human financial advice. There are thousands of investment advisers in the UK available to provide advice for a fee. If the needs of the client are more complicated than investing a discrete sum of money and instead they would like a holistic assessment of their entire financial needs then human advice will always be available to them at a fee. In addition, it is highly unlikely that there is a significant group of people in the UK with sufficient assets to invest but that do not have access to a device with internet access.
However, each of the risks identified can be mitigated through the appropriate design and oversight of the service. We believe it is important (and indeed in the UK it is a regulatory requirement) that the design and operation of the online service is overseen by a qualified financial adviser.
Given the high cost of customer acquisition and building a brand, the winners in this space will be established companies with a large existing customer base. We believe that early entrants with these characteristics and that are able to continually innovate will be able to build sustainable businesses. Eventually, given the low cost of technology and the relatively simple algorithms involved, it is likely that almost all UK wealth management firms, banks and execution only stockbrokers will offer automated investment advice.
The benefits to both consumers and financial institutions described in the Discussion Paper, in our opinion, significantly outweigh the potential risks (all of which can be mitigated by a well designed service with appropriate human oversight). Accordingly, we encourage the ESAs to take appropriate steps to support the development of the automated finance advice market throughout Europe.
1. Do you agree with the assessment of the characteristics of automated financial advice tools presented in this Discussion Paper? If not, please explain why.
Yes.2. Are there any other relevant characteristics of automated financial advice tools?
No.3. Are you aware of examples of automated financial advice tools being used in the banking, insurance, and/or securities sectors? Please provide examples, giving details of their operating process.
Yes. Currently the primary example in the UK is Nutmeg and in the United States are WealthFront, Betterment and Charles Schwab. Each of these companies has an operating process similar to the automated financial advice tools described in paragraph 26 of the ESMA paper.4. Do you offer/are you considering offering automated financial advice tools as part of your business model? If so, please briefly describe: i) what type of entity you are, e.g., long established, start-up, a product provider, an intermediary; ii) the service you provide (e.g. to what extent do you integrate human interaction in the tool you provide?); iii) the nature of your clients; iv) your business model; v) who developed the automated tool (i.e. an external company or developed internally?); and vi) the size of your activity and/or forecast activity?
Yes, IG is considering offering automated financial advice as part of its business model. IG is a FTSE 250 company based in the UK with a 40 year history in facilitating leveraged trading by retail investors. The service that we will provide will be similar to that described in paragraph 26 of the ESMA paper. Our existing clients are financially sophisticated with above average wealth but we will be also targeting the general retail customer in the UK. IG’s automated tool is being developed internally, significantly leveraging technology and staff from InvestYourWay, a “robo-advisor” acquired by IG in November 2015. IG’s offering is not yet operational.5. Do you consider there are barriers preventing you from offering/developing automated financial advice tools in the banking, insurance and securities sectors? If so, which barriers?
We do not consider that there are significant barriers preventing us from offering our automated advice service. While we must apply to the UK Financial Conduct Authority for the appropriate regulatory permissions this is at most a six month process and not unduly burdensome.6. Do you consider the potential benefits to consumers to be accurately described? If not, please explain why.
With the following exception we do consider the potential benefits to be accurately described:• While consumers do have ready access to a wider range of service providers using automated tools they do not necessarily facilitate cross border transactions compared to human advice. Investment advice is regulated nationally which makes it impractical to offer such advice to consumers in other countries.
7. Are you aware of any additional benefits to consumers? If so, please describe them.
An additional benefit not described is the ability of an online interface to provide a much more engaging and continuous experience compared with periodic meetings or telephone calls with human interaction. For example, the customer can track the performance of his or her portfolio regularly on a mobile advice and receive automated personalised updates from the service.8. Do you see any differences in the potential benefits arising for consumers in each of the banking, insurance and securities sectors?
NA9. Have you observed any of these potential benefits to consumers? If so, please provide examples and describe the kind of benefit that has accrued.
Although our service is not yet operational, we have observed these benefits from services provided by other companies. For example, Nutmeg has brought low cost financial advice to customers investing as little as £1,000 and have made it very easy for their customers to open a personal pension online.10. Do you consider the potential benefits to financial institutions to be accurately described? If not, please explain why.
Yes.11. Are you aware of any additional benefits to financial institutions? If so, please describe them.
An additional benefit is the opportunity to establish a reputation for innovation and putting the customer first by offering the same or better performance at a lower cost.12. Do you see any differences in the potential benefits arising for financial institutions in each of the banking, insurance and securities sectors?
NA13. Have you observed any of these potential benefits to financial institutions? If so, please provide examples and describe the kind of benefit that has accrued.
Although our service has not yet launched we anticipate that all of the benefits described will accrue to us.14. Do you agree with the description of the potential risks to consumers identified? If not, explain why.
With the following exception we agree with the potential risks identified:• We believe that it is highly unlikely that consumers may no longer be given the opportunity to access any human financial advice. There are thousands of investment advisers in the UK available to provide advice for a fee. If the needs of the client are more complicated than investing a discrete sum of money and instead they would like a holistic assessment of their entire financial needs then human advice will always be available to them at a fee. In addition, it is highly unlikely that there is a significant group of people in the UK with sufficient assets to invest but that do not have access to a device with internet access.
However, each of the risks identified can be mitigated through the appropriate design and oversight of the service. We believe it is important (and indeed in the UK it is a regulatory requirement) that the design and operation of the online service is overseen by a qualified financial adviser.
15. Do you consider there to be any risks to consumers missing? If so, please explain.
No.16. Do you see any differences in the potential risks arising for consumers in each of the banking, insurance and securities sectors?
NA17. Have you observed any of these risks causing detriment to consumers? If so, in what way?
No.18. Do you agree with the description of the potential risks to financial institutions identified? If not, explain why.
Yes.19. Do you consider there to be any risks to financial institutions missing? If so, please explain.
No.20. Do you see any differences in the potential risks arising for financial institutions in each of the banking, insurance and securities sectors?
NA21. Have you observed any of these risks causing detriment to financial institutions? If so, in what way?
No.22. Would you agree with the assessment of the potential evolution of automated advice? Please provide your reasoning.
Yes, to the extent that the assessment relates to the UK market and automation in the securities sector.23. How do you think that the market for automation in financial advice will evolve in the near future in the banking, insurance and investment sectors? Please also provide details of any relevant data or information to support your views, where available.
We believe that the market for automation in the investment sector in the UK will grow rapidly as consumers become increasingly aware of the high costs that they are paying for traditional products that underperform their stated benchmarks, particularly services that construct investment portfolios using low cost Exchange Traded Funds.Given the high cost of customer acquisition and building a brand, the winners in this space will be established companies with a large existing customer base. We believe that early entrants with these characteristics and that are able to continually innovate will be able to build sustainable businesses. Eventually, given the low cost of technology and the relatively simple algorithms involved, it is likely that almost all UK wealth management firms, banks and execution only stockbrokers will offer automated investment advice.
24. Are there any other comments you would like to convey on the topic of automation in financial advice?
We believe that automated investment advisers will play an increasingly important role in the UK market. These services will cater both to those who have fallen into the so-called “advice gap” as well as wealthier customers that do not need or do not want to pay for traditional advice. However, we believe that traditional advice will always be available for those willing and able to pay for it.The benefits to both consumers and financial institutions described in the Discussion Paper, in our opinion, significantly outweigh the potential risks (all of which can be mitigated by a well designed service with appropriate human oversight). Accordingly, we encourage the ESAs to take appropriate steps to support the development of the automated finance advice market throughout Europe.