The first is that robo advice must be focused on a particular need are, and therefore the objective of the investment is, by definition, clear. For retirement planning, the risks are that:
• The desired level of income will not be achieved;
• Retirement may need to be delayed;
• Inflation may erode the planned retirement income.
Because robo advice offers no (or very limited) contact with human advisers, the second feature is that much greater effort has to be made to set consumer expectations carefully. In a well-designed robo process, stochastic forecasts of the outcomes are given prominence.
Consumers can change the amounts invested, the timescale and even the objective target amount to achieve optimal outcomes for themselves. The risks of failure can be clearly seen and realistic objectives can be set in the light of these risks.
If volatility of markets is mentioned, it is there to inform consumers, but does not drive recommended solutions.
Certainly, not all robo advice systems are wonderful, and there are obvious limitations compared to traditionally delivered advice.
However, because of these limitations, extra effort has to be applied using technology to translate the results from a risk profile questionnaire into something meaningful to consumers – namely the risk of not being able to fulfil their goals.
The technology behind robo advice can be applied generally to support traditional advice, and offers something far superior and much more defensible than simply mapping the output from a risk questionnaire to investment solutions based on volatility alone.
Bruce Moss is strategy director of eValue
