If you were seeking advice on your finances, who would you trust? For most, the answer would be an accountant or an investment advisor, but in a surprising development a growing number of us are turning to less conventional (and less human!) sources. While it might seem like a concept from a science fiction novel, robo-advisors are growing in prominence and are capable of providing financial advice to their clients based on a series of mathematical rules or algorithms. While many Britons are not yet aware of robo-advisors and are uninterested in using one (73%), a growing minority has driven significant growth in the sector over the past year and there are now more than 100 different robo-advisors on the market.
With robo-advisors on the increase, it is going to be necessary to persuade the population that they are up to the job, and a large part of that lies in building up trust. The seeds of this are perhaps already there. BanklessTimes.com has analysed a study published at the end of February 2023 that revealed that one-fifth of Britons would already trust a robo-advisor as much as a traditional financial advisor, with 8% even going so far as to say that they would trust the robot more than its human counterpart.
This is perhaps a little surprising given that the technology is so new and relatively unknown, but it is not without justification: robo-advisors have faced more than a decade of regulation and scrutiny, and are all regulated by FCA, the financial authority responsible for regulating all financial institutions in the United Kingdom. Some would therefore argue that robo-advisory oversight is even tighter than banking oversight.
Trust is Important in the Banking Industry
Trust has always been an important factor in the financial industry, and a recent report highlights the fact that a client’s trust in their advisor is every bit as important as actual performance. In fact, 94% of investors who highly trusted their advisor were likely to refer them to their friends and family members.
Trust is a multi-faceted concept, but of the 94% who “highly trusted” their financial advisor, many struggled to pinpoint precisely where this trust stemmed from. One thing that did stand out, however, was that clients were more likely to trust their advisors if they felt their functional, emotional and ethical needs were being met. But is this too much to ask of a robo-advisor?
How Ethical are Robo-Advisors?
Robo-advisors recommend investments without emotional bias, as their algorithm only makes room for rational decisions. There are often times during the traditional investment process when investors allow or even encourage emotional or behavioural influences over their portfolios, but Uhl and Rohner (2018) believe that, in time, the pragmatic approach will win out, with robo-advisors helping their investors overcome their less logical considerations.
While questions about robo-advisors inevitability throw up issues of ethics and emotional bias, the reality is that only 1 in 10 consumers identify this as an important factor to consider when seeking a robo-advisor. Instead, the top priority, identified by more than a quarter of customers, is security of investmentJonathan Merry, CEO of Bankless Times
How do Robo-Advisors Work?
So how does it all work? Robo-advisors typically function by asking customers a series of questions to determine their current financial position, future goals and attitude to risk, before using those answers to suggest a suitable ready-made portfolio.
A robo-advisor typically uses exchange-traded funds (EFTs) and passive trackers. Otherwise known as passive investment funds, they invest in a whole share index, which means that the investment is diversified across many companies, spreading the risk.
As one might expect, robo-advisors tend to have lower fees and low minimum investment levels, making them more suited to first-time investors. This is the key to breaking into the market, because cost was identified by almost a quarter of Britons (24%) as the most important consideration when choosing a robo-advisor. While fees vary between providers, they start at a very reasonable 0.25% per annum. This gives robo-advisors a strong edge against their human competitors, who charge on average £150 per hour in the United Kingdom. As always, clients can expect to have to pay fund charges, which vary depending on the funds that they are investing in, but these are typically in the region of 0.2%.
1 in 5 Britons Feel Reputation is the Most Important Factor
Reputation is of course important, with 20% of Britons pointing to this as their key consideration when choosing a robo-advisor. Recognising this, a number of reputable and long-established brands have jumped on the bandwagon, such as Morgan Stanley with their E*Trade Core Portfolios. Recommendations and favourable reviews on esteemed industry websites, such as Forbes and the Business Insider, can also be key to the success of both new and old names.
Despite security, cost and reputation being the three biggest considerations that consumers call to mind when choosing a robo-advisor, a major hurdle to surmount is the fact that, at present, 57% of Britons would never consider using a robo-advisor at all.
So how can the industry turn this around? The issue largely comes down to trust, and while a sizeable minority already feel comfortable with robo-advisors, the fact is that 28% of consumers regard them as “somewhat less trustworthy” than human advisors, and a further 22% of consumers consider them to be “significantly less trustworthy”.
As ever, new technologies and ways of working take a while to gain a foothold in public consciousness, and if robo-advisors can establish a track-record of cost-effective results, attitudes are bound to soften over time. Perhaps for now the answer lies in slowly educating the public of the myriad benefits of using a robo-advisor. At the point of writing, only 2% of Britons surveyed had used a robo-advisor and only 3% were aware of their qualities, so there is a lot of work still to be done.
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