The so-called advice gap has been a major concern for a number of years now. The “gap” refers to the large number of people who do not seek financial advice. The danger is that they will not save enough to see them through a comfortable retirement. And those that are saving run the risk of making bad investment choices, which could result in big losses.
The continuing need for accessible, affordable financial advice is becoming more of a concern with people living longer and being retired for longer. Many people will simply run out of cash if they don’t make proper provisions.
This is where robo-advice - already common in the United States - comes in.
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What is robo-advice?
Robo-advice is for the people who can’t afford - or justify the expense of - professional investment and savings advice, but don’t have the financial know-how to make decisions and devise a retirement plan.
Robo-advice doesn’t actually involve robots. It is essentially a clever computer programme which will help pick investments for long term savings, in exchange for a low fee.
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How does robo-advice work?
You are typically offered an investment portfolio which is automatically generated following an online questionnaire to identify your savings goals and attitude to risk.
The website will most likely set up and manage your portfolio for you, although websites do differ in what services they offer.
Robo-advice is limited to portfolio management and so personal aspects of financial planning, such as retirement, tax and estate planning will remain untouched.
It also doesn’t offer a “human touch” which investors might miss in times of market turmoil or a change to personal circumstances that would typically prompt a conversation.
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Is robo-advice safe?
Robo “advice” offerings are in fact only guidance or suggestions and not tailored advice. This is a bit of a grey area as sometimes the two appear blurred. The crucial difference is that there is no consumer protection if you don’t get advice.
Where there is regulated advice (which comes under the watchful eye of the City watchdog, the Financial Conduct Authority) consumers have the right to claim compensation should they be mis-sold an investment.
There is no such protection for those who have bought an investment under robo-advice.
Will it catch on?
Robo-advice can provide access to the complicated world of finance in a cheaper way, which is better than no advice at all in most cases. There are already several versions of this kind of advice available from the likes of Nutmeg, Wealth Horizon and Money on Toast.
Yet it cannot deal with wider financial planning and so will not be a substitute for many people who have complex financial affairs.
Citigroup estimates that assets managed by robo-advisers could reach $5trillion during the next decade, expecting the boom to be fuelled by younger investors who are comfortable investing online.
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