There is a lot of talk at the moment about robo advisers and whether they could be the answer for the increased number of people who now need advice at retirement. Robo advice is very new to the market and is not yet widely available at retirement, but may be soon. However, there is a lot of confusion about what it actually is and what it offers.
Jonathan Watts-Lay, director of WEALTH at work, has created the Q&As below to shed some light on his thoughts on the suitability of robo advice at-retirement, the possible pros and cons, and what those approaching retirement need to watch out for.
Why do I need financial advice at-retirement?While the pension changes are good news, without financial education and advice individuals are vulnerable, not just to the headline-grabbing scams, but to paying unnecessary tax, using the wrong assets for income, and ultimately not making the right decisions in retirement. The PLSA research of over-55s shows that people do need advice. Over half (52%) of those who expressed a preference for how they were going to access their pension savings thought drawdown would provide a guaranteed income, almost a quarter (23%) thought income drawdown was risk free and a quarter (25%) of all respondents thought their whole pension was tax free.
What is robo advice?Robo advice is often really just a sophisticated self-selection tool. Individuals complete a detailed questionnaire and based on the answers given, the tool recommends investments or products for that individual. It is available to investors now, but isn’t widely available at retirement yet, but may be soon.
Is there any human interaction?Robo advice means different things to different people, which is part of the reason why there is a lot of confusion in this area. Most people believe that there is no human interaction during the process, however, some providers do support robo advice with human contact in the form of telephone and/or online support. Sometimes these are financial advisers, and sometimes just customer support helping customers through the process. In my experience, few people are going to be willing to hand over their hard-earned pension to a robot to manage. I believe many people prefer to deal with financial matters face to face, particularly when nearing retirement as the decisions are so much more complex and the implications of getting a decision wrong are so much bigger.
How does it work?Most robo advisers offer a range of portfolios divided into risk levels. Investors are asked a series of questions to establish investment goals and attitudes to risk, and the system will then suggest investments or products which might be suitable for that individual.
Does it offer the same protection as regulated financial advice?Advice is where a specific action is recommended by a regulated adviser. If the action recommended through regulated advice (face to face or robo advice) then the consumer is has a higher level of protection if this turns out to not be right for them than if they made their own choices without advice. It is important to realise that despite the name some ’robo advisers’ actually only offer an explanation of types of product which might be suitable, but not a specific recommendation, in other words they offer guidance.
Is robo advice a good option at retirement?There may be a place for robo advice for people who are saving and want to make simple investment choices during their life, and it may be appropriate for some of those who really do not have any other assets than their pension at-retirement. However many people also have ISAs, other pensions, partner assets, property, savings and perhaps inheritance to consider. This leads to two main issues; will a robo adviser review someone’s complete financial situation, and if they do this, how many online questions is it going to require?
Will a robo adviser review my financial situation?First, robo advisers may not fully review your current situation or consider your interlinked financial decisions, so it is important to check what is being offered. For example, some people may be better off spending their savings before touching their pension to avoid paying unnecessary tax, but this advice may not be available through robo advice. In other words it may be possible to get a really great product, but it might not be the right one for you.
What do you mean by a great product, but not the right one for me?Like the annuity aggregators popular in the past, many people were very pleased with the annuity rate they were offered, but didn’t realise that this was one of the few occasions when admitting to having poor health or to being a smoker actually meant that they could be entitled to an enhanced annuity, which would have offered an even better rate. Some robo adviser may just sell customers a product. They might be great products for some, but not for all.
What information will I need to provide to the robo adviser?If your robo adviser is able to take all of this into account, including tax status, health, life expectancy etc, the number of questions, and the time required to answer them may be significant. Retirement income planning requires a lot of questions to be answered. This can be a long process face to face, but it is the adviser’s responsibility to get it right once they have established your circumstances. With robo advice, individuals may have to work through a lengthy questionnaire on their own, reliant on their interpretation of the questions. Even if they have the patience to finish, will they be sure they have answered everything correctly?
Will a robo adviser provide annual reviews into old age?Many are likely to need help with their finances into old age and while some will be computer literate, financial decisions may become harder and often have emotional elements, which robo advice will struggle with.
How do the costs compare?The fees quoted for face-to-face advice often include the additional cost of the investment platform, fund manager fees etc. Those considering using a robo adviser should check what these extra fees are as if the advice is to invest, then these fees will need to be paid, and using robo advice for retirement income planning may not actually save money, and could even cost more.
The bottom line….When it comes to major life decisions how would you prefer to make these? Most people ask a joiner and plumber to fit their kitchen, a lawyer to defend them in court, and a midwife to deliver their babies, all major life events which have major consequences, just like retirement income planning.
