Laura Balkarova, an insurance analyst at Timetric’s Insurance Intelligence Center, tells Life Insurance International why robo-advisers are set to reinvent the way people invest for their future, with digital advice solutions expected to become more relevant in helping retirees to navigate the new pension freedoms.

Balkarova says although robo-advice is in its early stages in the UK, more providers and advisers will be looking to launch automated, online services to bring advice back to the mass market.

Robo-advice, or the use of automated technology, is currently one of the most debated topics in the financial advice industry.

Robo-advisers are online wealth management services which use algorithms to generate investment routes for customers based on their financial circumstances, goals and attitudes to risk.

Earlier this year, major high-street banks were all reported to be eyeing entry into the robo-advisory space. Some advisers see the rise of robo-advice as an opportunity, while others are concerned about the risks that emerge with this new form of advice.

In the final report of the Financial Advice Market Review (FAMR), the Financial Conduct Authority (FCA) recognised that "technology, including fully automated models, has a key role to play in reducing the cost of advice, making it affordable for more consumers".

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Under the FAMR recommendations, the FCA will set up an Advice Unit to "help firms developing automated advice models to bring these to the mass market more quickly". The FCA’s chief executive Tracey McDermott confirmed that the new Advice Unit "will be open for business to firms of all sizes" from May 2016.

According to a Deloitte 2015 report, the leading 11 robo-advisers in the US, including Betterment, Personal Capital and Wealthfront, covered $19bn of assets under management (AUM) at the end of 2014, although this is still a fraction of the country’s $25trn retail investable assets.

Robo-advice in the US

Last year, financial giants such as Charles Shawn, Blackrock, Fidelity and Vanguard also launched automated investment services, reacting to the rapid growth of robo-advice start-ups in the US.

The UK robo-advice market is still nascent. However, the FCA’s approval of robo-advice could now pave the way for new entrants looking to introduce automated, low-cost digital advice solutions.

Since April 2015, hundreds of thousands of over-55s have been able to use the new pension freedoms to access their retirement savings. The need for pension advice has never been greater, however, savers with modest pension funds often find it difficult to get advice.

Industry commentators now see a real opportunity for robo-advisers, offering services "at a fraction of the cost of traditional, face-to-face advice", to fill in the gap between free guidance and full advice.

The Retail Distribution Review (RDR), introduced three years ago, removed the potential for ‘commission bias’ and improved the quality of advice available to those with larger sums to invest.

However, the move to a fee-based advice model resulted in millions of people unable or unwilling to pay for advice. RDR led to a significant reduction in adviser numbers and also made it ‘uneconomical’ for banks and adviser firms to serve lower value clients.

The FCA revealed that, "on average, financial advice costs £150 per hour, and giving advice on a pension requires an average of nine hours on the part of the adviser" (FAMR, March 2016).

According to the FCA’s product sales data, in 2014-2015, about two-thirds of retail investment products, including pensions, retirement income and investment products were sold without advice, up from 40% in 2011-2012.
This trend reflects the lack of consumer engagement with advice. It is also indicative of the growth of direct-to-consumer (D2C) and self-served models, and the increased use of online tools in financial decision-making.

Growing interest

Against this background, there is a growing interest from financial services firms in automating the process of advice as they aim to capitalise on the evolving technology.

In March 2016, it was reported that Standard Life announced plans to enter the automated D2C market, while Scottish Widows is said to be looking into developing a form of robo-advice.

In August 2015, LV= obtained a majority stake in Wealth Wizards, a UK-based automated advice firm.
LV=’s Retirement Wizard online regulated advice service is designed for those who are within three months of access to their pension pot and have a pot size of up to £150,000.

The service uses Wealth Wizard’s algorithm-based platform to generate specific product recommendations for pension savers planning for retirement. Customers can create an online advice report for a fixed cost of £199, with telephone support also available from LV=’s in-house adviser team.

High-street banks are also said to be preparing to offer robo-advice services in a bid to re-engage with thousands of retail investors in the mass affluent and mass market segments.

The move by established players into the robo-advice area is considered to be a defensive response to the growing number of specialist providers, including Fiver a Day, Nutmeg, Money on Toast, Strawberry Invest, Simply EQ, SCM Direct and Wealth Horizon, which currently offer some form of online investment advice.

Chart: Decline in Adviser Numbers in the UK, 2011-2014



Source: Financial Advice Market Review (FAMR), March 2016

Most robo-advisers limit their services to automated asset allocation and portfolio management, but protection insurance professionals are also investigating their application for robo-advice.

Royal London’s head of protection Debbie Kennedy recently told Life Insurance International (LII) that robo-advice is an area the UK mutual life and pensions company is looking at since it has the potential to open up protection to the mass market.

Kennedy said: "As protection business is already sold through non-advised and telesales channels, there is knowledge and experience available that the industry can learn from. There are two ways this could potentially go – robo-advice could become a channel in its own right or could even open up a new route into existing channels".

Scott Kallenbach, research director at US-headquartered insurance association, LIMRA, told LII in January 2016 that: "Over the next 5-10 years, may see robo-advisers taking a more holistic view of client needs. They will be able to offer more sophisticated investment options, and I would not be surprised if they offer life insurance and related products".

For more information on Timetric’s Insurance Intelligence Center, please visit