Notwithstanding the strides that have been made in terms of the technology that underpins digital investment management – robo-advice – there is still some disagreement as to who is likely to be attracted by the new platforms, or whether early adopters will prove to be core customers down the line.
It remains to be seen whether or not robo-advisers will convince investors to move away from their more traditional savings and investment channels and it seems likely that robo-advice will represent part of the solution some of the time; at the recent Robo-Investing Europe 2016 conference Chris Williams of Nationwide Building Society said that it had customers with ‘different needs at different times’.
Investors that are comfortable with digital technology have been seen to move across to these new investment channels, and it is tempting to surmise that the new breed of platforms will primarily prove attractive to technology savvy Millennials; as this generation accumulates wealth, those that grew up online could be a valuable source of growth for the digital wealth managers.
Those that conduct the majority of their affairs online are beginning to expect the same smooth digital experience from their finance providers, and that is a brief the robo-advisers fulfil nicely.
However, it’s a tough time to be a Millennial – a recent survey by PWC suggested that economic instability, crushing student debt, stagnant wages and looming uncertainty about retirement was causing those born between 1982 and 2000 to suffer from the weight of financial fears to an extent that was affecting their work performance and personal well-being.
If cash-strapped Millennials are not to be early adopters there is some evidence to suggest that those more experienced investors are being attracted by the instantly diversified, risk assessed investment portfolios that the robo-advice platforms serve up as well as their low, transparent pricing.
However much the media would have enjoyed running pictures of queues outside Fred Olsen and Harley Davidson offices in the immediate aftermath of the 2015 pension freedoms, the Greyed British Public have actually proven to be a pretty sober bunch; those that have accessed their pension pots appear to have done so in order to either pay off debt or to achieve a better income than they could from an annuity.
the Greyed British Public have actually proven to be a pretty sober bunch
There has been a surge in DIY investing among over-55s with the time and inclination to research investment opportunities and take responsibility for generating income in their retirement; no doubt some of the £9b that has been invested in the Woodford Equity Income Fund has been withdrawn from pension pots, but then they have not been let down as the fund returned 15% in 2015.
However, with the robo-advisers pledged to concentrate on outcomes, those not wishing to go the whole hog in terms of DIY investing may find the new breed an attractive proposition, particularly as awareness and understanding grows around exchange traded funds (ETF).
Swanest, which is currently testing a beta version of its platform has set out its stall to ‘put people back at the heart of financial services by empowering self-directed investors with technology that helps building and managing personalised investment strategies’, and says that users of robo-advisers come from every generation.
It is tempting to throw a blanket over those offering robo-advice and talk about them as a homogeneous bunch; in fact, whilst there may be similarities between them, there are big differences in their operating models and approach to technology and investments.
Some platforms are totally automated relying on algorithms to manage all core activities from customer on-boarding to asset allocation; others offer a hybrid service for customers, where human inputs are added to the customer service and investment process, in order to better complement the use of technology.
more experienced investors are being attracted by the instantly diversified, risk assessed investment portfolios
MoneyFarm for example launched in 2012 with a purely digital service but found that despite being comfortable with the technology, customers wanted to have the option to speak to an advisor.
Set in the context of the overall wealth management space it is perhaps understandable that early robo platforms focussed their attention on lower net worth individuals in the retail investment market.
Denied access to traditional advice, these individuals typically have too little capital to be served by traditional asset managers and with its operational efficiency robo-advice can accommodate lower entry requirements; Betterment, for example allows customers to sign up with no minimum investment.
However, in what appears to be a classic ‘gap in the market/market in the gap’ conundrum, the venture capital backed newcomers have struggled to return profits and have not yet found a cost-efficient way to recruit new clients; in short they are still nowhere near as big as the industry incumbents they set out to disrupt – the challenge of making investments ‘engaging and interesting’ as identified at the conference remains a key challenge.
However, incumbent investment firms, brokers and banks are well aware of the robo-advisers’ long term potential impact on the industry landscape and have been actively working together with the insurgents.
In the States, large institutions such as Charles Schwab and Vanguard have developed their own low-cost, automated advisory service which appears to validate the robo-adviser’s business model, but also highlights the importance of access to very large numbers of potential investors.
The world‘s largest asset manager, BlackRock, acquired US adviser, FutureAdvisors, to complement its offering and more and more robo-advisers are looking beyond retail investors to institutional partnerships.
Many advisers now offer ‘white-label’ versions of their platforms to traditional asset managers, or provide B2B propositions leveraging existing platforms and rather than delivering a fatal blow to traditional advice, it may be that the new platforms will underpin a whole new breed of financial advisers.