Updated 30 March 2022
So you’ve heard about ‘robo-advice’ – you’re just not sure what it means. Could online apps really deliver a service comparable to financial advice? Here are some reasons to be sceptical. Article by Nick Green.
Isn’t modern technology fab? You can chat to far-flung friends, meet the love of your life online, get into blazing rows about Brexit with complete strangers and much more besides. It’s easy to start believing that computers can do anything – even advise you on the best way to draw your pension. There’s much talk of automated apps – dubbed ‘robo-advisers’ – becoming widespread in the near future, and speculation that they (and other digital advice offerings) could replace existing financial advice in some cases.
Although it’s true that we’ll see more planning tools and information services, it would be misguided to suggest that these could replace the role of financial advice. In fact, to put too much trust in the technology could put consumers at risk of poor choices, with potentially serious consequences for their retirement. Here’s why.
Alan Turing said that we’d know a computer was thinking when you could hold a proper conversation with it. That’s not anywhere close to happening. The best you would get from robo-advice would be an algorithm to take you through the choices and calculate probable figures. This may be very useful, but it misses out one of the essentials of true advice: the conversation. Talking with an adviser generates new ideas, helping you realise things about yourself and your situation that you may not have noticed before, so can often lead to you completely rethinking your approach.
Wait – financial advisers can read minds now? Well, not exactly. But they can read faces, voices, body language, and all the other nuances of social interaction. In short, they can tell if you truly understand what’s being explained to you. A computer can’t. It can show you the facts on the screen and its job is done – it’s not the website’s fault if you misread or misinterpret a crucial point. Your adviser, on the other hand, can easily tell if you see it all – or if you're all at sea.
Nor can a computer ensure you are fully aware of the risks involved. For example, a person who believes they have a high risk tolerance may reconsider this when faced with all the facts. Who is to say that your idea of ‘high risk’ matches theirs? Face-to-face advice dissolves such communication barriers.
Surely that’s wrong! Computers are the most objective things in the world, aren’t they? Well, it's true to an extent. The problem is not the computer per se, but the user. Yes, the single most dangerous source of bias is you yourself. ‘Confirmation bias’ is the well-documented tendency of people to notice and believe only the information that confirms their existing views, while giving less credence to everything else. When it’s just between you and the computer, you’re at the mercy of your own unconscious prejudices about your finances, which can influence how you interpret the results. By contrast, talking to an IFA removes that risk, because they aren’t just independent of product providers – they’re independent of you, too.
One of the oldest warnings in the computer handbook: the machine is only as good as the data you feed into it. Unlike an IFA, the computer won’t notice if, for instance, you have a forgotten pension scheme kicking about somewhere, or anything you don’t directly tell it. But an IFA will thoroughly interrogate your financial arrangements including all the things you may have missed, before making any suggestions.
Any app that appears to dispense advice will most likely come with a disclaimer – saying that users act on its guidance at their own risk. This is because a computer can provide only information and/or execution of wishes – it can’t give anything equivalent to a personal recommendation. ‘Buyer beware’ applies to all information obtained in this way – the choice is still yours, along with all the risk. By contrast, an IFA does make recommendations, is regulated by the FCA and may be held accountable if they are judged to have dispensed unsound advice.
The big argument for robo-advice is that it will be cheaper than seeing a financial adviser. This may be true in the short term. But the real cost of advice should be considered over the lifetime of the advice itself. Information from a computer may demand a lower up-front cost – or may even be free – but the long-term rewards are likely to be lower too.
None of this means we shouldn’t try out new technologies. Mortgage calculators, online pension forecasts and portfolio management apps are already enormously popular tools, and the future must have many more treats in store. But the way to use them is as a supplement and precursor to full advice, rather than as a substitute for it. Used in isolation, an online tool may become a confirmation bias machine: telling you only what you want to hear. To get true advice you need proper two-way communication, and that’s something only a human financial adviser can provide.
For a taste of how computers can help you get advice, try out the Unbiased Cost of Advice calculator.
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