AT THE end of the last millennium I worked for a large publishing company that assumed, as they all did, that websites were a licence to print money.
That’s why I spent a year trying to sell internet advertising to food processing companies. It was mostly in vain. Few of them had even heard of the internet, and those that had were deeply sceptical of the value of advertising on it.
Rightly so too – whereas my employer wasn’t sceptical enough about the dotcom world it was diving into headfirst. Like many other firms, it jumped on the bandwagon in the belief that they just had to build a website or add an “e” to the start of their name to make a fortune in the brave new world of online start-ups.
There are echoes of the dotcom bubble now in the form of “robo-advice”. It’s not the scale that reminds me of the dotcom years, but the rate at which they are launching, the ease with which they are raising capital and the rubbish that some of them are coming out with.
By robo-advice, we’re talking about online firms that ask investors to complete questionnaires on their risk appetite and goals, using algorithms to generate portfolio recommendations.
Only a few actually offer advice. That’s why the high street banks are getting in on the action, seeing it as a low cost, low liability way to flog mediocre products to the mass market.
But, as in 1999 and 2000, the industry, the regulator and large sections of the financial press are so dazzled by the potential and the novelty of it all that their critical faculties are failing.
Robo-advice does have benefits. It’s low-cost, accessible and represents an opportunity to engage more people in saving and investing. But there are some big potential downsides too, including the prospect of mis-buying (and mis-selling) on a massive scale. This is compounded by a lack of clarity around the protection you have when buying investments through a robo-adviser.
Among the newest arrivals is Moneyfarm, which represents much that is worrying about the way the market is developing. Its homepage tells you that it’s a regulated “online investment adviser” that gives “totally unbiased advice”. You would reasonably take from this that it offers advice, which would mean you could complain if that advice turns out to be poor.
You’d be wrong. On the FAQs page it says that in fact they don’t give advice because they’re a discretionary investment manager. In others words, you take responsibility for your own decisions and can’t go to the ombudsman to complain about poor advice. That’s fine, but make sure people know that; don’t mislead them.
Moneyfarm is perhaps unfortunate to be singled out here, because it’s far from the only robo-adviser providing far too little clarity as to what they do and how you’re protected.
The City regulator is keen to support robo-advice, seeing it as helping meet a need for accessible, affordable advice. And it’s right to, because there is a huge amount of potential there – provided the risks are identified and managed.
But as the launches come thick and fast and the banks prepare to join the fray, there’s a risk of letting the hype blind us to the dangers until it’s too late. We’ve been here before – and it doesn’t end well.