Over the years Helm Godfrey chairman Danby Bloch and I have often discussed the practice of financial planning. Our views have consolidated around regarding advice businesses as process engineers. We conclude that good adviser firms engineer their processes to be efficient but without trimming the client.

    The problem I’ve always had with restricted propositions, especially ones aimed at building huge firms, is that their engineering always ends up converting clients into squares regardless of what shape they were when they began the process.

    As a simple example, just having one set of portfolios managed by an in-house DFM strikes me as OK for a St James Place but not OK for a high net worth IFA or wealth manager, which ought to have a suite of investment propositions matching the needs of the wide range of clients they are bound to have. Even SJP now seems to agree with this since it bought Rowan Dartington precisely in order to enable its salespeople to offer discretionary fund managers (DFM) as an alternative to their in-house proposition.

    Buying or building one off-the-peg system that handles the whole advice process is attractive if you think just in terms of sausage machine efficiency. You can probably get rid of more untidy bits of process and more paper. But when clients don’t fit the process you either have to squeeze them out of shape or go off piste.

    If you were really risk averse as the proprietor of an advice business, you simply wouldn’t deal with any client the process couldn’t handle. In this you would be following the line laid down by legendary Fidelity fund manager Peter Lynch, who said he got his strongest buying signals when he visited the outlet of a store chain and the manager told him: “You know, any idiot could run this joint”. “Terrific!” was Lynch’s response, “because sooner or later some idiot will be running it.”

    “Robo” or, if you prefer, “digital”, is bringing this more and more to the fore. What bits of the process can you automate without creating unnecessary risk for the client or the advice business? The simple answer, obviously, is that the less money people have got the more you can automate, because rich people have more complicated circumstances (especially tax) and requirements than poor people.

    Thankfully, Mr Osborne is busy making the UK tax system even more complicated, which means that genuine tax planning can deliver worthwhile savings to anyone with more than £200,000 of investments – more than enough to cover a 1% fee. That sort of tax-efficient investment planning is way beyond the capabilities of the smartest algorithms out there at the moment. And since the tax system can change abruptly (as with the recent gains tax changes), no adviser is going to want to get hooked into using a piece of software that only gets updated six months later. That tells me it’s going to be quite a while before robo gets anywhere near a proper financial planner’s lunch.

    On the other hand, creation of simple portfolios based on asset allocations derived from some form of questionnaire is certainly feasible and is probably no more subject to catastrophic failure than advisers’ home-grown solutions. My concern here is that robo risk profilers do not take sufficient account of capacity for loss, and I don’t see how they can. There are literally dozens of factors that an adviser will routinely take into account in assessing capacity for loss, and the adviser will also give them different weights depending on other circumstances, and so forth – a typical example of the recursive nature of judgement-forming processes at which a trained human brain excels. While it probably doesn’t matter much during accumulation, a lack of awareness of risk capacity can prove fatal in decumulation – a big risk for robo.

    Of the 600-odd risk assessments we have now undertake with the Harbour suitability and risk assessment system, more than one in four risk profiles generated by the system have been overridden by advisers. This despite having the client’s answers to 20 questions covering objectives, timescales, income needs, tolerance, knowledge and experience. The reason is that there are many more potential circumstantial constraints on capacity than can be captured by generic questions, especially for clients who are entering decumulation. Our advisers record the reasons for overriding the score from the questionnaire, and this forms part of the suitability report we give to clients, making the exercise educational as well as informative.

    So my view is that suitability assessment, rather than being something advisers over-simplify by automating, is something they should try to enhance so that they can demonstrate the value of their service. And they should also try to enhance their investment proposition so that it is not, unlike auto-allocation to four traditional asset classes, vulnerable to the increasingly probable catastrophic failure of the modern portfolio theory models that underlie robo systems.

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