In terms of its adoption of robo advice the US got the drop on Europe and the early arrivals at the robo advisors ball are now looking ahead at a whole raft of ways in which to engage an audience in cyberspace.
Start-ups such as Wealthfront and Betterment were the pioneers in the robo advice space aiming to democratise investment by offering simple, low cost automated investment advice.
More recently, big banks there including Goldman Sachs, Wells Fargo and Morgan Stanley have joined the fray, attracted by the ability to serve customers at a lower cost than with human wealth advisers.
Whereas one of the key challenges facing the start-ups is the cost of customer acquisition, incumbents already have a large client base to market additional services to, and the advent of cyborg or hybrid advisers has breathed new life into the financial adviser sector that many feared could be wiped out by automated advice.
Robo-advisers account for a small piece of the US wealth management industry, currently overseeing roughly $200 billion of client assets; however, it is predicted that figure will mushroom to $2.2 trillion by 2020, with a supportive regulatory environment and cost pressures on traditional advice.
In the UK, with reliable figures regarding the total number of customers and their assets under management as rare as hens’ teeth, the figure of £1.1 billion AUM suggested by Boring Money instinctively feels about right; HSBC has become just the latest high street bank to announce its entry to the market.
Robo advice was initially targeted at tech savvy millennials and their adoption is reflected in the age profile of the main protagonists in the US; Wealthfront says that 60% of its customers are younger than 35, and 75% of Betterment’s customers are under the age of 50.
‘marketing campaigns, which in some instances may have crossed a certain line in wanting to proclaim ‘yoof’’
In the UK, millennials struggling with student debt and the high cost of accommodation were initially beaten to the punch by relatively mature, experienced investors looking to keep costs low; however, the crop of micro-savings and investment apps that encourage a ‘little and often, for long’ (think Muckle) approach, are gaining traction.
Millennials have been attracted to robo advice by simple and transparent fee structures, an intuitive digital user experience, and personalisation based on the user’s appetite for risk.
On both sides of the Pond, robo advisors are aggressively positioning themselves as the antidote to traditional, stodgy wealth management firms; witness their marketing campaigns, which in some instances may have crossed a certain line in wanting to proclaim ‘yoof’.
The emergence of ‘celebrity’ robo advisors such as Gemma Godfrey, reaching out to a brand new audience with engaging propositions such as Moola, does much to shake off the fusty City connotations of investments.
‘The emergence of ‘celebrity’ robo advisors such as Gemma Godfrey does much to shake off the fusty City connotations of investments’
Muckler says that if it encourages an environment of financial self-reliance and establishes long term savings and investing habits, then that works just fine; indeed reaching beyond the pool of the ‘initiated’ has long been the holy grail of the financial services world.
A speaker at the Robo-investing Europe 2017 conference said ‘our challenge is to make investing interesting, engaging and fun…..and it’s just not’; however, it seems perfectly legitimate to Muckler that the robo advisers should point out the range of outcomes an individual can expect in pursuit of a particular objective given different levels of commitment.
Introducing the Automated Personal Finance Manager
Commentators in the States believe there remains a disconnect between these new services and the millennials to whom they cater; the interface may appeal, but their core proposition is often aligned with the goals of an older generation – building long-term wealth through investment.
Those looking ahead to what may become robo advice 2.0, in lieu of true artificial intelligence, argue that millennials don’t need an investment advisor, rather they need a financial advisor to help them balance their personal, career and money goals.
Previous generations turned to investment as a vehicle to build wealth to fund them in retirement; in that millennials are not massively misaligned – 70% of millenials in a recent survey said they feel anxious about retirement savings, although 40% of respondents said they have no plan in place to save for retirement
Millennials’ goals are often more complicated, because they have much more on their minds – paying off student debt, advancing their careers in a volatile job market, building a family and putting a roof over its head.
So, instead of an investment advisor, millennials need a financial advisor to help them accomplish their personal, career and money goals rather than simply build wealth.
To achieve this vision, an automated financial advisor would need much more information than a robo advisor would typically collect during the account opening process.
In addition to building an investment strategy based upon investment and risk preferences, the next generation of automated financial advisor would need to fully understand customers’ goals and how they prioritise some over others; an emotional dislike of being in debt may see the client seek to pay off cheaper debt and eschew potentially higher yielding investment opportunities, just to get it off their back.
The challenges facing an automated financial advisor will be great – rather than adopting a strategy purely designed for long term wealth accumulation, the number of competing scenarios could be many and varied.
Consider the contrasting considerations of a newly married couple set on buying their first property against a recent graduate weighing job opportunities in different cities with the first student loan payment looming.
Armed with this information and client preferences, algorithms could advise clients on juggling their finances to reach their unique goals; almost certainly the automated advisor would need a holistic view of a customer’s financial affairs.
Someone like you
Down the line the service could benchmark a client’s financial health and progress against customers who have similar financial profiles and personal goals, as well as deliver real-time advice on purchases and financial decisions.
Technological advances will be needed to provide such complex and personalised advice but the level of investment being made in artificial intelligence and machine learning by a wide range of financial services providers, suggests that it is only a matter of time before an automated advisor will be able to provide insights around achieving personal, career and financial goals.
Becoming robo financial advisors (‘Personal Finance Manager’ – ‘PFM’? Robo Financial Advisor- ‘RFA?’ Digital Financial Advisor – ‘DFA’?– we’ll need a name) could allow the start-ups that have gained traction with millennial investors to differentiate themselves from traditional wealth management providers and capture greater market share as their clients inherit an estimated $30 trillion in wealth and investments from their parents and grandparents over the next couple of decades.
‘Personal Finance Manager’ – ‘PFM’? Robo Financial Adviser- ‘RFA?’ Digital Financial Advisor – ‘DFA’?– we’ll need a name
This could ultimately decide whether the current start-ups survive, whether they are squeezed out by the incumbents or whether they are usurped by tech companies and etailers; Betterment has already taken the first step toward more personalised advice by allowing customers to link external banking and investment accounts.
Tom’s Guide indicate that there are at least 27 budgeting and personal finance apps available in the States, including Albert, Wally and Spendee (see previous comment re ‘yoof’!); in the UK, Muckle’s Micro Savings and Investment Comparison table show that such apps are starting to appear here and could form the foundation for PFM-type services.
An extension could be for a personalised financial advisory service; in the US personal finance app Mint already connects to most (if not all) of a customer’s accounts, and recommends financial products in pursuit of their goals based on their current savings, any debt they may have and their investments.
A PFM could achieve far greater customer engagement and potentially replace traditional financial institutions as the source for financial advice and education.
Major technology providers such as Apple and Google, and etailers such as Amazon are investing heavily in machine learning and could use their mobile wallet functionality to become trusted financial advisers; data doesn’t come much bigger than the information they have about each and every one of us.
Traditional financial services firms in the UK such as Killick and Brewin Dolphin have already targeted millennials with investable assets with robo advice of their own eg Silo, but a PFM proposition could allow them to establish a long term relationship, remaining relevant as their circumstances evolve.
Institutions and technology companies have the resources and incentive to keep pace with the latest developments in machine learning with the prize being a much deeper understanding of, and much wider proposition with which to engage millennials, on every step of their financial odyssey.
How many clutching student debt wish that their parents and grandparents had had access to a PFM; how can it make sense that a student can leave university £50,000 in debt with interest accruing at 6.1% when their parents could raise the necessary finance with a 0.89% mortgage from Yorkshire Building Society? (see School of Hard Knocks)
The start up robo advisors, concentrating almost solely on wealth creation, could prove to be just the beginning of what is possible with algorithm-based financial advice; in the future automated advice can be the common thread of long term, and evolving relationships with millennials that encompass and understands all aspects of their personal financial affairs.