FCA warns on robo-advisers after finding some are ‘potentially misleading’ customers


The City watchdog has issued a warning to investors using online robo-advisers after it found evidence that some of them are ‘potentially misleading’ customers over fees and the type of advice they offer.

In a damning guidance paper published this week, the Financial Conduct Authority found some online robo-advisers were being ‘unclear’ about the fees they charged investors. 

Others were found guilty of ‘potentially misleading’ investors by claiming they were offering cheaper advice than competitors – but they failed to mention that their offering was not personalised financial advice that took into account an individual’s financial circumstances, whereas the services they were using as a comparison were.

Some firms  compared their fee levels against peer services in a potentially misleading way

Some firms  compared their fee levels against peer services in a potentially misleading way

Some firms compared their fee levels against peer services in a potentially misleading way

Investment firms can offer different levels of service, ranging from full fat financial advice to what has been termed guidance  and allowing investors to choose their own investments.

Wealth managers also typically offered discretionary services – where they choose, manage and switch investments for you – and non-discretionary services where actions are left up to the customer.

Most robo-advisers offer some form of questionnaire that assesses risk and your investment goals combined with a portfolio building service, but it is not always clear what exactly is being offered and what bracket it fits into. This is important as customer protection varies.

The report said: ‘Some firms did not make clear whether their service was advised, non-advised, discretionary or non-discretionary. 

‘Some firms also compared their fee levels against peer services in a potentially misleading way. 

‘For example, they compared a non-advised, non-discretionary service with a discretionary service solely on a cost basis without explaining the difference in the nature of the service.’ 

The regulator also found that some firms did not ask clients about their investment knowledge and experience at all, as they felt their service was suitable for all individuals regardless of how experienced they were. 

Assessing firms against their requirement to undertake a suitability assessment – whether the investment offered to the customer is an appropriate one – it found that some did not properly evaluate a client’s knowledge and experience, investment objectives or capacity for loss.

Some firms did not ask clients about their knowledge and experience at all, and told the FCA their service was suitable for all individuals regardless of their investment knowledge and experience.

What’s more, for firms providing automated advice services, the watchdog said it was not satisfied with the strength of information gathering about clients’ financial circumstances.

For example, some services failed to request or gather adequate information about customers’ debt and other outgoings. 

The FCA was also critical of the handling of vulnerable consumers – with some offerings relying on the client to self-identify as vulnerable.    

It said: ‘The market for both online discretionary investment management and auto-advice services remains at an early stage, with a number of firms expected to launch services over the coming year.

‘We continue to encourage innovation in automated investment services. While this is an evolving market, our rules on suitability of advice apply regardless of the medium through which the service is offered.’ 

The FCA reviewed seven robo-adviser firms as part of its regular monitoring of how financial services firms treat customers. It did not disclose which firms were part of the review. 

It went on to say that many of these firms, also known as online wealth managers, had since made ‘significant changes’ to their services in response to the report.

What the robo-advisers had to say 

Responding to the report Martin Stead, chief executive of online wealth manager Nutmeg, said: ‘We share the FCA’s desire to ensure all customers are getting a fair deal and an investment strategy which is suitable for their individual situation and needs.

‘As the online wealth management industry grows, with many new entrants entering the market, we welcome tighter regulation and scrutiny to ensure that all firms are following best practice and delivering services that are in the interest of customers.’  

Rival adviser, Giovanni Daprà, chief executive officer and co-founder of Moneyfarm, also welcomed the review, claiming it offered a ‘useful update’ to existing guidance.

He added: ‘Moneyfarm is proud to have been one of the first firms to offer regulated investment advice over a self-selection, execution-only model. 

‘This advice is crucial to ensure portfolios are suitable for customers and adds an additional layer of protection, anything the FCA does to level the playing field will undoubtedly benefit consumers.’

How to pick the best robo adviser 

Robo-advice can be a misnomer because full-fat financial advice is not on offer in most instances. So it is important to check whether your chosen robo-adviser is actually offering financial advice. 

These services typically offer an online risk profiling tool in the form of a questionnaire and then feed the information to clever algorithms that guide the investor towards an appropriate portfolio.

Some allow you to pick from a selection of risk-rated portfolios which are managed and rebalanced periodically.

Others offer advice, albeit a watered down form called simplified advice, and build a portfolio best suited to your circumstances.

The automated element means robo-advisers are usually low-cost by comparison to traditional face-to-face. 

Most keep fees to a minimum by placing cash in a basket of passive investments that track stock market indices like the FTSE 100. 

For more information, read our guide on how to pick the best How to find the best robo-adviser to invest with – and do they really offer financial advice? 


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