Advice or Guidance: Robo-advice or Semi-Automated Digital Guidance

This article was originally published on AltFi News.

As discussed previously, and debated at many a fintech conference, many of the new breed of robo-advisors and digital advice platforms do not actually provide financial advice. In the eyes of the financial regulator the digital asset managers will often provide a much simpler service which the FCA describes as investment guidance. Robo Guidance whilst a more accurate descriptive term for many of these platforms is not yet in common parlance. For comparison the term ‘Robo-Advice’ is now widely seen in the national press and has even been included in the OED (Oxford English Dictionary), robo guidance is so far only discussed by investment compliance consultants and regulators and has yet to trend on Google.

Both the regulator and provider hope that; A consumer attracted to a fintech asset manager with their simpler customer journey and simpler message should be able to understand the products available. However confusingly the service received when using a digital advice platform may not be clear, even to a regulatory expert. The terms “advice” and “guidance” are explained in different ways by different providers, and even a compliance specialist can find this confusing.

The term “guidance” is considered less encompassing than ‘advice’ and is often seen to be explained in negative language.  Descriptions of guidance in standard Terms and Conditions frequently listing items that the service did not offer rather than outlining the benefits.

Examples below are the standard disclaimers seen on providers anxious not to be seen advising

• We do not provide advice

• We do not provide recommendations on investments

• We will not advise you about the merits of a particular investment

• This is not advice

• We do not give you a personal recommendation

The FCAs take on what constitutes guidance is included below

• Guidance is an impartial service which will help you to identify your options and narrow down your choices but will not tell you what to do or which product to buy; the decision is yours.
• Providers of guidance are responsible for the accuracy and quality of the information they provide but not for any decision you make based on it.
• Guidance is free unless your provider clearly tells you otherwise.
• It will suggest what you could do

For comparison the regulators take on the broader advice product

• Advice will recommend a specific product or course of action for you to take given your circumstances and financial goals. This will be personal to you, based on information you provide.
• Advice will be provided by a qualified and regulated individual or online by a regulated organisation.
• Providers of advice are responsible and liable for the accuracy, quality and suitability of the recommendation that they make and you are protected by law.
• You will usually pay a fee for advice. Fees will be disclosed before you are asked to commit yourself.
• It will recommend what you should do

Interestingly the FOS (Financial Ombudsman Service) has stated that if a consumer feels that they have received advice. Then they would be minded to agree with them, and with the line between the two offerings blurred if not inconsistent then it seems a few disclaimers ‘This is not advice’ etc may not be enough to ensure full compliance or that advice has not been given.

The inconsistency between these two product types is creating a situation where both the consumer and the platform provider could easily be confused as to which product or service they are transacting. Clearly this is not ideal, and the regulator and the industry need to work together on creating commonly accepted standards. A clear explanation of the differences would encourage competition in addition to promoting a better understanding of the services available. By making services more directly comparable the consumer can better find value for money or find the service most appropriate for their needs.

The Financial Advice Working Group has performed market research to understand consumer opinions on the matter, their findings supported the need for more communication on the matter

• Participants had conflicting views on what constitutes “advice” and “guidance”, with many transposing the meaning
• Participants lacked understanding of what services to associate with “advice” and “guidance”
• Participants were unfamiliar with the concept of “guidance” in a financial context.

It seems that “financial guidance” is not yet a familiar term, despite the simpler process being a valuable addition to the financial product range available to the consumer.  The industry will need to work harder to communicate its benefits to the small saver.

If the asset manager recommends a specific product or course of action for to take to take given individual circumstances and financial goals – then it is likely that the provider has crossed a line and is providing ‘Financial Advice’. This requires more detailed reporting, a greater regulatory cost and the need to create a ‘Suitability Report’.

Under the now ubiquitous MiFID II, a suitability report will have to be issued 'before the conclusion of any contract' recommended in it. There has been some debate in compliance circles around when a contract is concluded. But best practice should be providing the report to clients before they make a decision on how to proceed and also provides relevant information to the client allowing them to make a more informed decision. (Hopefully) leading to a better customer experience.

The need for a Suitability Report is one of the more obvious differences between advice and guidance. If you have received a suitability report it is likely that you have received some form of advice and a recommendation that is personal to you. Although we have opened trial accounts at some of the entrepreneurial robos and not received a report!