The possible pros and cons of robo-advice

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The Financial Advice Market Review (FAMR), carried out by the Financial Conduct Authority (FCA) and the Treasury has found that automated advice could "play a major role in driving down costs".

That would open the door for millions of people to get the information they need to make better decisions about their money at key points in their lives.

The move towards robo-advice has already begun in some quarters, with RBS announcing they would be investing in automated advice systems and cutting around 550 jobs as a result.

The advice gap

The FAMR report says that the average cost of financial advice is £150 per hour - and being properly advised on a pension requires an average of nine hours.

Citizens Advice research suggests that just 8% of us would be willing to pay more than £500 for advice on an investment, and then of course many of us aren't just unwilling but unable to pay for such advice.

Even when we are, we may well be out of luck - because of the cost of providing good advice, the FAMR found that many firms focused on customers who had a significant amount to invest - either above a certain threshold, or in the form of a total pension pot.

The proportion of firms requiring a minimum investment amount of £100,000 has increased from just 13% in 2012 to 32% in 2015, and an FCA survey found that 45% of firms rarely offered retirement income advice to those with pension savings of less than £30,000.

And while most of us may feel like we don't need financial advice all that much, there are times in our lives when it doesn't matter how little we have, we need to know how to make the most of it.

But then as well as the issue of cost, there's the fact that the advice we seek at such times tends to be quite narrowly focused.

Streamlined advice

One of the reasons good financial advice costs so much is that gathering all the information needed to give a full assessment of the best options for a client is time consuming.

The regulations as they stand do allow for advisers to offer "simplified advice" for simpler situations, under which they don't have to collect or analyse any information that isn't directly relevant to the situation in question.

But this kind of advice hasn't really taken off - in part because advisers have been worried that any complaints made about any "simplified advice" they give may be judged against the standards relating to "full advice", which are much stricter.

So the FAMR's report calls for clearer guidance for the advisers themselves, and gives some examples of the type of situations in which streamlined advice would be suitable.

These include a 20-something wanting to know whether to save or invest to start building up a deposit for a house, a new parent looking for some kind of life insurance, and someone looking to invest a lump sum for a grandchild's future education.

It's not difficult to imagine a robo-adviser being set up to deal with customers in circumstances like these - and they'll have the added advantage of being available at times that better suit more of us.

At what cost?

But this won't be cheap.

One of the issues brought up during the FAMR was how firms would be able to recoup the costs of setting up and marketing their new robo-advisory services.

Some have said they see little option but to charge higher fees for the advice they already offer, which could seriously impact their ability or desire to develop the kind of mass market automated advice service being suggested.

That's effectively what's happened at RBS.

While they've decided to invest heavily in creating an automated service for those with "as little as £500" to invest, they're cutting around 550 investment and advice jobs to do so, and restricting their face-to-face financial advice to those with more than £250,000 to spare.

The FAMR report says firms will be given some leeway in recouping their costs through fees, at least initially - so we should expect prices for everyone to come down again once the systems are bedded in.

Where next?

But given that RBS are reducing the number of human advisers, and restricting the services of those they have left to only the wealthiest of customers, what happens if someone accessing a robo-adviser finds it can't help - or even gives them bad advice?

Presumably these are the kind of issues that the FAMR expect to be addressed in their recommendation that the FCA create an "Advice Unit" to help companies develop their automated advice services.

In the meantime, however, there's one group of people who the FAMR know will be likely to need and benefit from the more traditional, all encompassing, financial advice already in place.

They're recommending that people approaching 55 - the age at which we can access our defined contribution pension pots - be allowed to access a small part of that money ahead of time, in order to pay for full advice before they reach retirement.