SCM Direct has delivered a heavily critical attack on the business models of robo propositions, saying its research indicated many were financially unviable.
Large-scale automated advice models should be brought to market more rapidly with FCA help, the authors of the Financial Advice Market Review said earlier this year. The FCA has been working on developing a specialist robo-advice unit to help bring new propositions to market.
Rather than being “the silver bullet the FCA and Treasury are hoping for in terms of bridging the advice gap” the automated advice services may create more problems than they solve, the company claimed.
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UK robo advisers are ‘wired’ to lose money, and may go bust before ever acquiring the sizeable assets under management required to ensure their sustainability, the firm said in its report.
The research estimated that the average UK robo-adviser receives revenue of just £147.50 pa per account, but the cost of acquisition is at least £180 pa per account; plus additional annual business costs.
The report stated: “These additional recurring costs, even if they ever achieved the same economies of scale as much largest competitors, amount to £130 pa per account. Thus it costs them £180 to make just £17.50 net each year.
“One well known UK robo-adviser firm reported costs in its latest available accounts of £9.42 for every £1 of revenue.
“SCM Direct estimates that an average UK robo account would need to be invested for nearly 11 years to reach profitability. However, research findings show the average holding period for a robo-adviser client may be just 3 years, partly the result of many targeting the younger, ‘millennial’ market even though they account for just 5% of the investible market.”
Researchers also claimed that some firms appeared to be straying into giving advice without possessing the requisite regulatory permissions or following the appropriate regulatory procedures.
The report concluded: “The findings of this research report leads SCM Direct to believe that the FCA needs to urgently apply the brakes and systematically review this nascent sector. But instead they announced on 5 July 2016 that they are setting up a robo-advice unit and allocating it £500,000.
“This SCM Direct research into 10 UK robo-advisers should prompt the FCA into conducting a thorough review, before rather than after the stable horse has departed.”
Gina Miller, co-founder of SCM Direct, said: “Our conclusion is that there is little evidence of robust innovation, as new robo-advisers appear to be fundamentally financially unviable and/or seem to be regularly flouting key FCA rules.
“It’s time the FCA to step in and protect consumers from the various issues raised in our report, which their US regulatory peers are already addressing.”