Robo-advisers do not spell out charges clearly, report warns
Robo-advisers fail to communicate their services effectively, claims a new report by the Financial Services Consumer Panel and Boring Money.
The report found that while what robo advisers have to offer is valuable, much needs to be improved. It argues that 'the same disrupters who point the finger at the "fat cats" of the asset management world are not clear enough on their charges'.
Just one of 15 consumer testers could correctly work out what the all-in charges of a £1,000 investment would be via a robo-adviser. The testers, chosen on the basis that they earned above £30,000 a year and save at least £100 a month, reviewed two of 15 online investment propositions in an hour-long session.
One of the key findings from the "deep dive interviews" was that robo adviser platforms are riddled with jargon.
The majority of people tested in the report did not understand common financial terminology, such as what as what a 'fund' is or what bonds, Sipps, exchange traded funds (ETFs) and investment trusts are - and the consumer testing found robo advisers do not offer any explanations for these terms.
The consumer testing also found that portfolio labels are confusing consumers with adjectives such as "defensive, cautious, balanced and aggressive", which mean very little without an explanation.
Sue Lewis, chair of the Financial Services Consumer Panel, criticised robo-advisers for not communicating clearly whether they were providing regulated advice or guidance.
Furthermore, she also raised concerns that many robo-adviser firms fail to disclose costs and charges in a way that allowed consumers to understand how much they would be paying and for what.
"More and more people with relatively small amounts of money to invest are turning to online investment services, many of them with cash they have released under pensions freedoms," she says.
"They need to know exactly what they are buying, what it costs, and what happens if something goes wrong. Most online firms are not giving them this information clearly, most of the time."
The panel has called on the Financial Conduct Authority (FCA) to lead an industry and consumer working group to develop simpler, more consumer-friendly language to be used consistently across the sector. The FCA should also ensure that charges are made clearer, the panel argued.
Ms Lewis adds: "It is obvious these firms do not have a clue how to communicate in a way their customers understand. The FCA should enforce its rules in this area vigorously, whether firms are giving regulated advice or not, before more people who can ill afford it lose out."
In addition, the report argues that asking consumers to self-select a risk profile (the amount of risk they are willing to take) is largely meaningless and unhelpful. 'Regulated execution-only providers should be able to offer more help to consumers,' the report adds.
Further, it found that the phrase 'capital at risk' was not understood by the majority of testers. While respondents knew that there was a risk of losing money with an investment proposition, the risks of losing money were typically exaggerated.
Instead, the report recommends providers should offer a fee calculator with adjustable inputs which provides illustrative costs of investing in sterling, not just percentages.
Holly Mackay, chief executive of Boring Money, says: "Language used online is still techno-babble. Most people haven't got the foggiest what an ETF or even a fund is. As for 'cautious', 'defensive' and 'balanced', they sound like psychological profiling rather than intuitive descriptors of an investment.
"The consumer journey is broken and we have to do more to help non-advised customers who want to make a start."
Nutmeg, the UK's first 'robo adviser', was launched in October 2012, but less than one in ten (9%) of UK adults in the report said they heard of the term robo adviser, while just 1% have invested with one.
The average robo adviser has customer account sizes of between £3,500 and £12,500 and an average customer age which falls between 37 and 45.
This compares to the more traditional DIY investment platforms with average account sizes of between £50,000 and £75,000 and an average age typically between 54 and 57.
This story was originally written for our sister magazine, Money Observer.
An Exchange traded fund is a security that tracks an index or commodity but is traded in the same way as a share on an exchange. ETFs allow investors the convenience of purchasing a broad basket of securities in a single transaction, essentially offering the convenience of a stock with the diversification offered by a pooled fund, such as a unit trust. Investors buying an ETF are basically investing in the performance of an underlying bundle of securities, usually those representing a particular index or sector. They have no front or back-end fees but, because they trade as shares, each ETF purchase will be charged a brokerage commission.
Describes the relationship between a client and a stockbroker or independent financial adviser whereby the broker or adviser acts solely on the client’s instructions and doesn’t offer any advice on which shares to invest in or financial products to buy and simply “executes” the wishes of the client, regardless if they are judged to be sound or wrong. Other types of broking service offered are advisory (whereby the client/investor makes the final decisions, but the broker offers advice) and discretionary (whereby the broker manages the portfolio entirely and makes all the decisions on behalf of the client).