With long term savings and investment as its beating heart, Muckle has primarily concerned itself with the ways in which robo advice could disrupt the market for investment advice in the UK.
It recently reported on a primary research project by Deloitte and the impact of robo advice in this area – ‘Trust a key issue as latest research shows demand for robo advice rises with income’
However, the report also explored other sectors that could be impacted by automated advice over the next decade and comes hot on the heels of an announcement by MortgageGym, which according to its creators is the world’s only regulated mortgage robo advisor, that it has completed a £2m seed funding round ahead of its launch.
The research concluded that the significant ‘advice gap’, driven by the high cost of advice, low financial literacy, low engagement and a lack of trust means the UK offers a rich opportunity for robo advice.
Pensions were considered to offer significant potential as individuals are increasingly managing their own affairs – both in accumulating a pension pot and then managing it to deliver income in retirement – and automated advice can play a key role in generating low-cost solutions by driving greater efficiency, improving consistency of advice and delivering greater convenience.
Deloitte’s analysis suggests that there is high potential for robo advice, with more than one third of consumers saying that they were willing to pay for it; this could equate to around 15 million customers, with great potential identified in each of the markets it examined.
The level of awareness and acceptance of robo advice is all the more remarkable given that general levels of engagement and financial literacy remain stubbornly low.
more than one third of consumers saying that they were willing to pay for it; this could equate to around 15 million customers
It suggests a clear appetite among consumers for affordable, non-traditional financial planning tools and levels of engagement could be expected to be even higher when the robo advisors get motoring in terms of marketing.
Deloitte’s findings confirmed previous polls in that demand is high among consumers in their early forties, not just millennials and that demand also rises with income.
While demand for robo advice generally rises with wealth, pension saving is an exception on the basis that demand is high among those with smaller pension pots – perhaps a sign of discontent with the charges levied by traditional pension providers.
However, consumers are unwilling to pay to pay high fees; 68% of working direct contribution (DC) scheme members said that they would expect robo advice to cost them no more than 25% of the typical cost of face-to-face advice.
One robo adviser told Muckle that a challenge was to convince customers that automated pension advice represented ‘good value’ on the basis that it could deliver in three minutes of automated number crunching, what an advisor would take eight hours to deliver – at an average of £150 an hour; sensible pricing whilst allowing the provider to turn a profit will be key.
Whilst Deloitte suggests that demand is strong, a core challenge for robo advisers to reach out to those that have thus far resisted the temptation to engage with their finances – making investing ‘fun, interesting and engaging – when it’s just not!’ as one told Muckler.
Accessing customers with traditional marketing is generally very expensive, especially for start ups, and low fees coupled with high customer acquisition costs could will inhibit provider appetite, or focus it on companies with the ability to leverage an existing brand, or customer base.
However, incumbents may be concerned that by offering robo advice they may cannibalise their higher-margin advised products.
Deloitte suggested that those considering offering robo advice should consider the following:
- Where is it feasible for you to maximise profit in the value chain e.g. advice, products?
- How do you acquire customers profitably?
- How much to charge (if anything) and how should you structure charges e.g. fixed or as a percentage of assets?
- How can you scale up your propositions?
- Costing of technology platform – purchase / development / maintenance?
Challenges of Regulation
Providers also identified regulation as an inhibitor with uncertainty in determining which services are regulated; however City watchdog, the Financial Conduct Authority (FCA), supports the development of automated advice models as an answer to the ‘advice gap’ created by RDR and will publish regulatory guidance to reduce the uncertainty.
Deloitte identified other regulatory challenges include the clarity of customer communications, the design and oversight of algorithms, and cyber risk; firms need to adjust their risk and control frameworks to reflect different customer journeys and to identify, review and manage risks presented by automated advice.
the settle down scenario may be a hybrid – or ‘cyborg’ solution
Regulatory requirements and low financial literacy pose a challenge and the cost and complexity of products such as at-retirement and mortgages may mean that a fully digital model may not be feasible or profitable any time soon; as in wealth management the settle down scenario may be a hybrid – or ‘cyborg’ solution.
Wealth management is expected to remain fertile ground for innovation, given current low rates of return offered on savings, but Deloitte predicts that the low cost and high convenience of automated advice will reach beyond wealth management, into retirement products and mortgages, where automated advice can drive significant efficiencies for providers and a much-improved experience for customers.
Deloitte sees no clear winner in terms of type of service provider – banks are well-placed due to their access to customers, although data sharing mandated by open banking regulations will help new players; life insurers, who typically administer large corporate pension plans are able to target plan participants.
Generally, incumbents are better placed than start-ups due to lower customer acquisition costs, although as we have seen with MoneyFarm and Scalable Capital’s white labels, start-ups do have an opportunity in B2B roles, given their lead on technology and in building leading-edge customer interfaces.
retailers such as Amazon or tech giants such as Google – all armed with the masses of big data that they have about your income, spending and perhaps browsing habits
In many respects we could be seeing the end of the beginning; the pioneers have been out there for a while now and we are starting to be able to compare and contrast their investment performance; banks have by and large got over the perceived threat and are adding robo advice to their suite of products; advisers have realised that automation gives them the opportunity to operate in a different way and that the future is likely to be hybrid.
Down the line, disruption could come not just from start-ups but from well-funded non-traditional players, such as retailers such as Amazon or tech giants such as Google – all armed with the masses of big data that they have about your income, spending and perhaps browsing habits.
With Wealth Wizards pioneering in the pension space, MortgageGym, is the first to enter the mortgage space.
The platform raised cash and technology development finance through deals with fintech investors Wharton Asset Management, China Pacific Capital and Trifecta Capital; it expects to announce its strategic distribution partnerships within the next three months, and is set to launch in the summer.
Now FCA-authorised, MortgageGym will allow homebuyers to complete their mortgage application online in 15 minutes through a free, hybrid advice website offering mortgage eligibility matching within 60 seconds, regulated robo advice and access to live advisers.
MortgageGym’s is different from existing online mortgage brokers such asTrussle and Habito,because the website itself is authorised to give advice, which the user will receive before they come into contact with a broker.
John Ingram, chief executive and founder of MortgageGym, said: ‘MortgageGym is committed to revolutionising the mortgage market through a whole-of-market, digital, free and accurate application process, which is the first of its kind.
‘We will provide mortgage applicants with peace of mind by advising them on mortgages they can realistically attain based on the strict affordability grounds laid out in the FCA’s Mortgage Market Review.’
With fintech a flourishing part of the London scene it will be fascinating to see which other facets of our lives are impacted by robo advice and artificial intelligence.