Response to joint Comitteee Discussion Paper on automation in financial advice
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I note that the European Supervisory Authorities set out a great deal of the underlying methodology of their consultation in the executive summary and the background section. Before dealing with each of the detailed questions in turn, I thought it would be useful to clarify that eVestor believes that the separation of the phenomenon of automation and the provision of the advice itself is artificial. It also potentially misunderstands the business model of firms such as eVestor where the two are intertwined, to the extent that the automation facilitates the provision of advice in new ways to new groups of consumers. Many consumers are currently excluded from the advice market due to, among other things, the high cost of providing face-to-face advice from highly qualified advisers.
I do not agree with the characterisation. The consultation paper definitions in para 7, pp 6-7 are too pedestrian and one dimensional in their description of the sector. Automated financial advice tools have the power to transform the relationship between consumers and providers of financial products, revolutionising both access to advice and the cost base of the industry. eVestor’s proposition for example, integrates financial advice with online delivery mechanisms. While it might be categorised as robo-advice or an automated service by some, it is simply financial advice delivered through 21st century means. eVestor is seeking to deal with modern consumers in the way that they would expect to be dealt with by any other service they use.
As the discussion paper acknowledges, the sector in the UK has undergone a revolution in recent years. eVestor envisages that this will continue, gather pace and evolve with consumer demand.
The advantage of innovative online models to new market entrants is that they can offer advice and services at a fraction of the cost of traditional providers, as they don’t have the same legacy in terms of large organisational overheads and cost structures. The best analogy is a comparison to firms such as Google who offer their services free of charge and monetise the data they generate.
i. eVestor is a new start-up online investment advice advisory business based in Wilmslow, Cheshire. It is planned to launch its service later in 2016.
ii. We provide an integrated range of products with both automated and adviser driven advice. We will offer ISAs, general accounts and pension drawdown, with a total of seven model portfolios.
iii. Our prime target is the next generation of savers and investors, rather than those who are already wealthy and well advised. We are looking to target anyone who is happy receiving financial advice online and engaging through digital channels whether they want to invest one pound or one million pounds.
iv. Our services will be available through our website and through smartphone apps with advisers available via Skype when the consumers want them. The entire service will cost 44 basis points or 0.44%. This consists of 35 basis points for the product and 9 basis points for the fund charges. eVestor’s portfolios are fully diversified from cash through to property and include all equity markets. We are not an online discretionary fund manager. We are an advisory business, using our own portfolio run on a discretionary basis, to help achieve our clients’ objectives.
v. eVestor is developing its tools and software in-house.
vi. eVestor sees huge opportunities in the UK market for providers and products that can facilitate saving and investment. Automated advice and online tools are evolving and the market will look dramatically different in five years. Further innovations such as artificial intelligence could also help extend the scope of the technology to replace some advisory work and further reduce costs.
The consultation does accurately capture some of the aspects of cost saving (Para 31) but the paper doesn’t accurately capture (Para 33) the diversity of delivery mechanisms. Technology is capable of providing more than automated tools through a more straightforward mechanism for getting financial advice, as consumers are in the process of considering financial products and services. Immediate online interaction through Skype and other tools are already capable of generating more complex scenarios than the paper envisages. The consultation is correct to acknowledge the flexibility of automated tools (Para 38) in incorporating market changes. It is also worth recognising however that this can work in two directions. Automated tools can also enable advice to be delivered in accordance with a consumer’s changing risk appetite as they age and pass through significant life events.
There are however issues of data security. These need to be addressed by any automated provider. eVestor has built its information technology from the ground up, so that data security is designed in at all levels. However, there are other firms that may have bought off the shelf technology or be reliant on data centres outside the European Economic Area, where their ability to keep data secure is not so clear.
The financial services market is evolving dramatically. Automated models have a place alongside contactless payment and other low friction technology driven products in driving significant innovation in the market.
The arrival of artificial intelligence has the potential to replace some advisory functions providing further cost reductions and value to consumers. eVestor would be concerned if banks and other financial institutions tried to hide behind regulatory barriers to restrict the deployment of this technology. This type of disruptive innovation is key to filling the savings gap that currently exists in countries such as the UK where consumers are increasingly expected to take greater personal responsibility for their saving.
It is also worth drawing comparisons from how younger consumers access services outside the financial sector to understand future consumer behaviour in financial services. There is a profound long-term shift taking place in the way that people interact with organisations and services across all fields and areas of life. As this younger generation matures, its needs will evolve but they will expect financial services providers to meet these needs in the same way that they access other services. So for example, as this generation ages, it will move from seeking advice about housing and short-term saving products, to advice about long-term saving products for retirement. eVestor anticipates that the market in technology driven advice will therefore need to move in tandem with this changing profile of expectation and interest in financial products.
This is an exciting time both for consumers and the industry. We are on the verge of a revolution in the provision as automation has the power to bring whole new sections of the population into saving. Moreover, it has the potential to do this at historically low cost levels meaning that, products will be more available than ever before and accessible to a wider range of consumers.
The Forrester Research data cited (Para 6) in the consultation paper accurately describes the digital revolution sweeping through both consumers and providers of financial services. The move to using digital communications is natively incorporated into our business model. We are seeking to deliver traditional advice by digital means and passing on the cost savings to users of the service.
Automation therefore has the potential to re-invigorate financial services and to rip up the old cartel like model of operation where customers had to seek broadly similar policies from a small and very similar number of providers.
The future for consumers from automation is bright. But this may not be the case for legacy providers that must adapt or die in this new environment. There does however need to be greater thought by national and EU regulators into how to manage this transition for the traditional players.
1. Do you agree with the assessment of the characteristics of automated financial advice tools presented in this Discussion Paper? If not, please explain why.
The enclosed is a response from eVestor, an online savings and investment advice business. eVestor aims to make investing more accessible and affordable for everyone in the UK, combining market-leading technology, an effortless user experience and seamlessly integrated regulated advice. www.eVestor.co.ukI note that the European Supervisory Authorities set out a great deal of the underlying methodology of their consultation in the executive summary and the background section. Before dealing with each of the detailed questions in turn, I thought it would be useful to clarify that eVestor believes that the separation of the phenomenon of automation and the provision of the advice itself is artificial. It also potentially misunderstands the business model of firms such as eVestor where the two are intertwined, to the extent that the automation facilitates the provision of advice in new ways to new groups of consumers. Many consumers are currently excluded from the advice market due to, among other things, the high cost of providing face-to-face advice from highly qualified advisers.
I do not agree with the characterisation. The consultation paper definitions in para 7, pp 6-7 are too pedestrian and one dimensional in their description of the sector. Automated financial advice tools have the power to transform the relationship between consumers and providers of financial products, revolutionising both access to advice and the cost base of the industry. eVestor’s proposition for example, integrates financial advice with online delivery mechanisms. While it might be categorised as robo-advice or an automated service by some, it is simply financial advice delivered through 21st century means. eVestor is seeking to deal with modern consumers in the way that they would expect to be dealt with by any other service they use.
As the discussion paper acknowledges, the sector in the UK has undergone a revolution in recent years. eVestor envisages that this will continue, gather pace and evolve with consumer demand.
2. Are there any other relevant characteristics of automated financial advice tools?
There is a huge problem with a lack of saving by consumers. The key characteristic of automated advice tools is to make saving attractive for a far wider audience. This is particularly acute, as the state, which operated default saving schemes, is in many jurisdictions withdrawing from the provision of these services.3. Are you aware of examples of automated financial advice tools being used in the banking, insurance, and/or securities sectors? Please provide examples, giving details of their operating process.
To date, legacy providers of financial services products such as traditional banks or insurance companies have struggled to provide radically different services using online tools. This is because they are still attached to their historic commercial models and consequently are dependent on higher levels of commission and large overheads.The advantage of innovative online models to new market entrants is that they can offer advice and services at a fraction of the cost of traditional providers, as they don’t have the same legacy in terms of large organisational overheads and cost structures. The best analogy is a comparison to firms such as Google who offer their services free of charge and monetise the data they generate.
4. Do you offer/are you considering offering automated financial advice tools as part of your business model? If so, please briefly describe: i) what type of entity you are, e.g., long established, start-up, a product provider, an intermediary; ii) the service you provide (e.g. to what extent do you integrate human interaction in the tool you provide?); iii) the nature of your clients; iv) your business model; v) who developed the automated tool (i.e. an external company or developed internally?); and vi) the size of your activity and/or forecast activity?
In a word yes. eVestor believes that the business model of legacy providers of financial advice are essentially redundant. These business models, used successfully by a range of different firms to provide financial advice over the last few decades depend on high commissions to provide legions of staff and cosy remuneration packages for directors.i. eVestor is a new start-up online investment advice advisory business based in Wilmslow, Cheshire. It is planned to launch its service later in 2016.
ii. We provide an integrated range of products with both automated and adviser driven advice. We will offer ISAs, general accounts and pension drawdown, with a total of seven model portfolios.
iii. Our prime target is the next generation of savers and investors, rather than those who are already wealthy and well advised. We are looking to target anyone who is happy receiving financial advice online and engaging through digital channels whether they want to invest one pound or one million pounds.
iv. Our services will be available through our website and through smartphone apps with advisers available via Skype when the consumers want them. The entire service will cost 44 basis points or 0.44%. This consists of 35 basis points for the product and 9 basis points for the fund charges. eVestor’s portfolios are fully diversified from cash through to property and include all equity markets. We are not an online discretionary fund manager. We are an advisory business, using our own portfolio run on a discretionary basis, to help achieve our clients’ objectives.
v. eVestor is developing its tools and software in-house.
vi. eVestor sees huge opportunities in the UK market for providers and products that can facilitate saving and investment. Automated advice and online tools are evolving and the market will look dramatically different in five years. Further innovations such as artificial intelligence could also help extend the scope of the technology to replace some advisory work and further reduce costs.
5. Do you consider there are barriers preventing you from offering/developing automated financial advice tools in the banking, insurance and securities sectors? If so, which barriers?
No, we do not see any barriers as such. eVestor is offering analogous saving and investment concepts to the services offered by the existing players. The only difference is that they are delivered in a new integrated way through a website and online tools.6. Do you consider the potential benefits to consumers to be accurately described? If not, please explain why.
No. New computer-aided advice offers a potential for a whole new market in financial products. Gone will be the situation whereby millions of people are effectively excluded from being able to get the best out of their savings as they will be able to access a pathway of simple tools leading up to full advice if they need it. This has the potential to revolutionise saving and access to advice for a whole range of financial needs.The consultation does accurately capture some of the aspects of cost saving (Para 31) but the paper doesn’t accurately capture (Para 33) the diversity of delivery mechanisms. Technology is capable of providing more than automated tools through a more straightforward mechanism for getting financial advice, as consumers are in the process of considering financial products and services. Immediate online interaction through Skype and other tools are already capable of generating more complex scenarios than the paper envisages. The consultation is correct to acknowledge the flexibility of automated tools (Para 38) in incorporating market changes. It is also worth recognising however that this can work in two directions. Automated tools can also enable advice to be delivered in accordance with a consumer’s changing risk appetite as they age and pass through significant life events.
7. Are you aware of any additional benefits to consumers? If so, please describe them.
The technological revolution will change the way that the industry works. Currently, there are too many poor products and too much consumer detriment from expensive or underperforming products. Worse still, many consumers have inadequate savings and no access to affordable advice. If properly implemented, automation could herald a sea change in both the availability of products and extent to which people can get advice.8. Do you see any differences in the potential benefits arising for consumers in each of the banking, insurance and securities sectors?
eVestor is unable to comment on sectoral differences.9. Have you observed any of these potential benefits to consumers? If so, please provide examples and describe the kind of benefit that has accrued.
eVestor is able to offer fees of just 44 basis points. This is far lower than many of the traditional providers. If this type of cost reduction is replicated across the industry then there will be clear benefits in the provision of products to consumers.10. Do you consider the potential benefits to financial institutions to be accurately described? If not, please explain why.
No. The tone of the paper fails to recognise the potential benefits and the extent to which automation can revolutionise the market. As set out in question three, the consultation does not really envisage a model like eVestor where high quality conventional advice is delivered through an online medium. Consequently, the cost reductions available through such a service (Para 40) are not correctly identified. Moreover, with regard to the quality of advice (Para 43) there is also a lack of recognition that this depends not only on market conditions, but also on the consumer’s personal circumstances. Again, automated tools and advice models are capable of taking this into account in a flexible way which is of advantage to both firms and consumers.11. Are you aware of any additional benefits to financial institutions? If so, please describe them.
For the institutions there is the prospect of being able to offer services at lower costs to a new mass market. Moreover, there will be lower client attrition given the ease of accessing the service. It will also allow firms to future proof their business models as increasing numbers of consumers go online.12. Do you see any differences in the potential benefits arising for financial institutions in each of the banking, insurance and securities sectors?
eVestor is unable to comment on sectoral differences.13. Have you observed any of these potential benefits to financial institutions? If so, please provide examples and describe the kind of benefit that has accrued.
Given the age and maturity of the technology, it is too early to comment on the potential benefits by means of giving examples. However, there are huge potential benefits in terms of the quality and cost of advice which companies like eVestor are working to deliver.14. Do you agree with the description of the potential risks to consumers identified? If not, explain why.
No. The identification of risks in the paper is too negative. There are multiple risks in the existing market potentially generated by misunderstandings and inappropriate advice. These are not substantively different with online models. Moreover, no market in financial services can be risk free. If properly implemented, there should be no greater risk with the automated models. Inconsistencies in the availability of advice and adequate access to financial products are a greater risk to consumers. Also, given eVestor’s business model we do not think that it is true to say that (Para 78) there will be a reduced supply of advice due to reduced demand. On the contrary, eVestor believes that there is a large untapped demand for advice which technology can help meet.15. Do you consider there to be any risks to consumers missing? If so, please explain.
Given the dependence of automated systems on technology, there are IT risks that need to be factored into any risk analysis. Again, many new providers have lower risks than traditional providers as they lack legacy systems and the problems that these can generate.There are however issues of data security. These need to be addressed by any automated provider. eVestor has built its information technology from the ground up, so that data security is designed in at all levels. However, there are other firms that may have bought off the shelf technology or be reliant on data centres outside the European Economic Area, where their ability to keep data secure is not so clear.
16. Do you see any differences in the potential risks arising for consumers in each of the banking, insurance and securities sectors?
eVestor is unable to comment on sectoral differences.17. Have you observed any of these risks causing detriment to consumers? If so, in what way?
The treatment of data as a commodity is a potential risk to consumers. There are others in the industry who seek to use data as part of their income generation model. This potentially generates a risk to consumers from the loss or inappropriate use of that data and also a potential conflict of interest, in terms of whether they are always acting in the best interests of their customers.18. Do you agree with the description of the potential risks to financial institutions identified? If not, explain why.
No, eVestor does not believe that there are increased conduct risks; if anything, there are fewer. In terms of systemic risk we see no difference from the deployment of automated models to the systemic risks already present in the industry.19. Do you consider there to be any risks to financial institutions missing? If so, please explain.
Aside from misselling scandals, there are a broader range of technology risks that clearly represent a risk to automated systems. There was some discussion of data in earlier questions. However, these broader risks warrant some further discussion. More firms are using third-party service providers and hosting solutions for both internet services and cloud-based storage systems. The issues are partially identified in the consultation (R6 and para 66, p 25). However, there is a broader issue, beyond phishing by social engineering (Para 67) disclosed. There needs to be a recognition of the dangers resulting from entire system hacks to both information security and reliability of online models. In early 2016, public bodies in the UK and in the US were subject to high profile ransomware attacks. It is always possible that such an attack might one day target a financial services provider.20. Do you see any differences in the potential risks arising for financial institutions in each of the banking, insurance and securities sectors?
eVestor is unable to comment on sectoral differences.21. Have you observed any of these risks causing detriment to financial institutions? If so, in what way?
There are risks to financial institutions arising out of automated models. However, these are not conventional risks. They are related to the preparedness of some of the legacy providers to respond to this fast moving technology. It is foreseeable that if legacy providers do not adopt new business models and subsequently find it difficult to complete in the new market, there could be risks arising out of threats to their revenue stream.22. Would you agree with the assessment of the potential evolution of automated advice? Please provide your reasoning.
Automated advice will allow providers to service different customers from those that firms have traditionally sought as customers. It will allow consumers who are not currently engaged in saving with traditional firms to access products and services in a way they have not done before.The financial services market is evolving dramatically. Automated models have a place alongside contactless payment and other low friction technology driven products in driving significant innovation in the market.
23. How do you think that the market for automation in financial advice will evolve in the near future in the banking, insurance and investment sectors? Please also provide details of any relevant data or information to support your views, where available.
Automation in financial services is an inevitability and has already moved apace. In particular in banking, the adoption of online models has been dramatic. However, eVestor believes that we are only at the beginning of the transformation that technology will ultimately drive in the financial services sector.The arrival of artificial intelligence has the potential to replace some advisory functions providing further cost reductions and value to consumers. eVestor would be concerned if banks and other financial institutions tried to hide behind regulatory barriers to restrict the deployment of this technology. This type of disruptive innovation is key to filling the savings gap that currently exists in countries such as the UK where consumers are increasingly expected to take greater personal responsibility for their saving.
It is also worth drawing comparisons from how younger consumers access services outside the financial sector to understand future consumer behaviour in financial services. There is a profound long-term shift taking place in the way that people interact with organisations and services across all fields and areas of life. As this younger generation matures, its needs will evolve but they will expect financial services providers to meet these needs in the same way that they access other services. So for example, as this generation ages, it will move from seeking advice about housing and short-term saving products, to advice about long-term saving products for retirement. eVestor anticipates that the market in technology driven advice will therefore need to move in tandem with this changing profile of expectation and interest in financial products.
24. Are there any other comments you would like to convey on the topic of automation in financial advice?
By way of a summary, it is worth considering the overall effect of automation in financial services.This is an exciting time both for consumers and the industry. We are on the verge of a revolution in the provision as automation has the power to bring whole new sections of the population into saving. Moreover, it has the potential to do this at historically low cost levels meaning that, products will be more available than ever before and accessible to a wider range of consumers.
The Forrester Research data cited (Para 6) in the consultation paper accurately describes the digital revolution sweeping through both consumers and providers of financial services. The move to using digital communications is natively incorporated into our business model. We are seeking to deliver traditional advice by digital means and passing on the cost savings to users of the service.
Automation therefore has the potential to re-invigorate financial services and to rip up the old cartel like model of operation where customers had to seek broadly similar policies from a small and very similar number of providers.
The future for consumers from automation is bright. But this may not be the case for legacy providers that must adapt or die in this new environment. There does however need to be greater thought by national and EU regulators into how to manage this transition for the traditional players.