Taking robo advice from 100,000 clients to 10 million

It was a delight and an honour to be asked by City & Financial to chair the Robo Advice and Innovation Conference. It’s been fascinating to see what a broad church robo investing has become, and just how many different specialisms you need to be a digital wealth manager in 2017. The country’s leading experts in compliance, digital engagement, risk management and consumer behaviour gave me a great deal of brain nourishment on a very interesting day.

I thought it best to distil some of the viewpoints and see where the consensus is for digital asset management which is predicted to become the main savings vehicle for UK investors within the next decade.

One theme to emerge is the coming entry of the banks. It seems that the incumbents are preparing to embrace robo advice in a big way! These developments will soon be more visible at branch level, with Santander and HSBC both developing interesting and different solutions. Both see a digital asset management offering as not just a way of increasing customer engagement but as a revenue centre in their own right.

‘It seems that the (banks)are preparing to embrace robo advice in a big way!’

An upcoming large and obvious evolution will be the inclusion of financial advice to the product offering of the major domestic players. It seems that platforms with pre-existing distribution are the necessary next step for UK robo advisors to go from 100,000 customers to 10m.

Dean Butler from HSBC gave an excellent introduction to the incumbent approach and how banks are embracing digital to increase their product range.

We were very lucky to have Janine Menasakanian of Vanguard introduce and explain the concept of Advisor Alpha.

Financial advisors have been under pressure since RDR 2012, and the FCA has sought an increase in the availability of financial advice, just as regulatory pressure caused revenues to decline.

Vanguard is not just about low-cost but also about collaborating with financial advisors to create even more value for end-users; it’s presentation sought to show the value advisors can and do provide to the retail market.

A great deal of quantitative research has been done by Vanguard and others to show the benefits IFAs can bring, with contributions such as behavioural coaching to help clients avoid wealth destruction and stick to investment plans, potentially creating 100-200bps of value per year.

‘avoid wealth destruction and stick to investment plans, potentially creating 100-200bps of value per year’

This combined with the low-cost implementation available on Vanguard’s platform creates a ‘man and machine’ approach with a strong competitive position; indeed the UK press described it as disrupting the market.

The other key takeaway was the importance of pensions. Standalone robo advisors or the ‘entrepreneurial robos’ have struggled with profitability, access to the wider pensions market, many times larger than their current offerings of general savings and ISAs could be the key. With similar customer acquisition costs but far higher revenues available profitability could be in reach.

There was broad consensus that advisor-assisted digital wealth managers are likely to be dominant for at least the next five years. The model combines the digital client portal and investment automation with some human contact available typically to conduct simple financial planning and periodic reviews over the phone.

It will be interesting to see if the market for robo advice embraces liability driven investment or LDI in the way the wholesale markets have as pensions become the most important part of the robo offering; currently LDI captures 90% of the institutional pensions market, but in the retail space RiskSave are the only robo advisor to demonstrate an LDI framework.

Ernst and Young’s pension guru Dan Mahoney believes that the value add that incumbents seek when entering the market will not be UX, UI or even investment process, but expert regulatory advice and ensuring ‘suitability’

It was interesting to note that many players are shying away from the term ‘robo advisor’ as, confusingly, many robo advisors do not meet the regulatory definition of advice.

Understandably, however, the more accurate descriptor ‘semi-automated digital guiders’ has not been taken up by the industry; with the somewhat unwieldy portmanteau ‘robo advisor’ gaining favour instead.

RiskSave take a contrarian view on this and follow Oscar Wilde’s advice from Dorian Gray.

‘There is only one thing in the world worse than being talked about, and that is not being talked about.’

Conclusions

• The entrance of legacy players is important to reach the mass market
• ETF providers and investment managers interacting with advisors can create even more value. The Man and Machine approach may be best.
• Adding a pensions wrapper to your digital wealth offering could be the route to profitability.

To learn more about robo advice and micro savings and investment visit www.muckle.online