The pitfalls of choosing a robo-advice provider and how to avoid them.

A number of companies are already coming up with cost-effective robo-advised solutions, and the market looks likely to take off if the Financial Advice Market Review suggests that the Financial Conduct Authority will back new technologies.

However, for robo-advice to work, people will need to be educated about choosing the right company, and understand the pitfalls and how to avoid them.

Three steps to good governance

1) Scams

One potential issue that it opens the door up to new scams. Margaret Snowdon, director at JLT Employee Benefits says: “If people put information into systems, they’re in just as much risk as giving too much information to a bogus adviser who traps them into a scam investment. We could end up with some serious scams that are easy to set up but difficult to spot.”

Jonothon McColgan of IFA-firm Combined Financial Strategies also warns of ‘phoenixing’. “That’s where unscrupulous advisers missell and then wind up the business, which means all the liabilities of that business die with it: and then they set up a new business.”

This problem could be a particular issue with companies set up solely online.

And with robo-advisers potentially advising on freedoms, care must be taken so that people do not see their retirement savings vanish into untrustworthy vehicles.

Checking for FCA regulated firms will avoid this issue and employers and schemes should speak to the regulator if they are concerned.

2) Tied-advice

McColgan is also worried that future robo-advice products might be pushed by providers. This, he argues, would lead to another kind of misselling, where banks and asset managers guide people towards their own products.

He says: “If it’s product providers that drive robo-advice, then my big concern is that it’s just going to be a way of driving people towards inappropriate products but with less responsibility on the provider of that product.”

Schemes and employers should look for partners that are truly independent. The easiest way to do this is to makes sure the robo-adviser is a regulated provider of independent financial advice (rather than tied-advice).

3) Cyber attacks

It will also be important that savers use a robo-advice firm that has good data protection, otherwise they could leave their finances open to cyber attacks.

In a world where a new company is hacked into every week, putting huge amounts of financial data online could also be risky.

As the data controllers for schemes, the ultimate responsibility for information security lies with trustees and scheme managers. This means that they could be liable for a fine of up to £500,000 in the event of a breach.

To avoid this, employers should ensure that they have done due diligence on their suppliers.

The easiest way to do this is to look at a supplier’s information security accreditation, says Monica Cope, chief operating officer at Veratta. Ideally, employers should look for suppliers who have an accreditation like ISO27001 or the Government’s cyber essential scheme.

“Asking your supplier if they have ISO270001 is a very straightforward question and that ticks the biggest box of all in relation to information security,” she explains.

To find out why robo-advice will be an important part of the armoury for schemes and employers, read part one of this robo-advice series.