Algorithms step into pensions ‘advice gap’

A generation of retirees is turning to robots to help them make the most of recently introduced pension freedoms, as human advisers shun their business.

Since April this year, hundreds of thousands of people in the UK have been making the most of freedoms to spend their pension savings as they wish from the age of 55.

But those seeking a professional adviser to help them decide how to spend, or invest funds wisely, are finding this difficult as traditional financial planners rebuff business that is considered of too modest size.

Experts say that with traditional face-to-face advice provided by a regulated professional costing around £150 per hour, those with funds of £50,000 or so are reluctant to pay, or unable to find an adviser willing to take on their business.

“We did some research among our customers to see what the pension freedoms meant to them and one of the things that came to the forefront very quickly was that customers were struggling to get advice,” says Richard Rowney, managing director, life and pensions with Liverpool Victoria, which has developed a retirement advice robo-adviser.

“With average retirement pots of £30,000 to £40,000, there’s a perception that advice doesn’t represent value for money.”

This year, the company became the first pension provider in the UK to launch a fully automated “robo” advice service that targets the expanding pension freedom market.

The service, called Cora, delivers fully regulated advice online, including a risk profile, suitability check and product recommendation, just as a human adviser would — but for £199, or a tenth of what some face-to-face advisers are currently quoting.

The development came as the government and regulators were encouraging the industry to innovate to close the “advice gap”, which has led to an estimated 5.5m savers becoming either unable or unwilling to access financial advice.

The government has set up Pension Wise, which offers free guidance to over-55s to help them understand new pension options, but this is only available to those with “defined contribution” pensions and not those with so-called final salary, or “defined benefit”, plans.

However, the government says technology could plug the advice gap.

“The exciting thing about robo-advice — a service that uses algorithms to help customers choose financial products tailored to their particular savings goals and risk preferences — is that it has the potential to be much cheaper and quicker than face-to-face financial advice,” says Harriet Balwdin, economic secretary to the Treasury.

“Robo-advice shouldn’t aspire to be simply a way of commoditising financial advice; it should be used to make advice better.”

Nutmeg, the most high-profile service in the UK’s robo-advice market, says people want advice but there is an unwillingness to pay large sums for it, as well as a lack of clarity around terminology and exactly what type of services are available.

“We want to solve the ‘advice gap’ created by traditional providers, who are often unable to serve anyone but the very wealthy,” says Nutmeg, which offers an online investment management service.

Many UK financial advisers routinely use technology to either enhance their service or help to reduce costs for clients. But technology is increasingly being used to replace human advisers, with clever software creating a profile of a customer and matching them with products or portfolios.

This year, a number of other robo propositions have, or are preparing to, come to the market as savers turn their backs on annuities and look for investment solutions for their retirement nest eggs.

Pension experts say a flurry of activity in the robo market was triggered after the Treasury announced the Financial Advice Market Review (FAMR), aimed at increasing access to affordable advice for everyone.

MoneyFarm, which describes itself as a digital wealth management company, is preparing to launch into the UK market. The businesses says “uses technology to deliver high-quality advisory and discretionary services at a fraction of the cost of a traditional wealth management firm”.

It will join other operators in the “robo space”, such as Wealth Horizon, Money on Toast and Fiver a Day, and offering “simplified advice” which does not result in a personal recommendation.

“The term ‘simplified advice’ describes a streamlined, automated, process-driven advice service delivered over the internet, supported over the telephone or by web chat,” says Simon Bussy, a senior consultant with Altus Consutling.

“This aims to address straightforward needs of consumers, such as those who want advice on a specific investment and not a holistic assessment of their financial situation.”

Mr Bussy says “robo adviser” vary on fixed price costs for reports, advice, implementation, through to charges for initial advice, ongoing advice, platform administration and investment management.

While automated solutions could widen access to advice for the masses, there are concerns that robo advice is not without risks.

“Robo-advice solutions are algorism based and therefore deliver formulaic results,” says Keith Richards, chief executive officer of the Personal Finance Society.

“Past mis-selling scandals have mainly been based on formulaic sales processes delivered of course by humans in the main and it is imperative that we don’t see history repeat itself with the greater use of technology,” Mr Richards says.