Seven things to know about 'robo-advice'
It is not hard to find predictions of the death of wealth management as a profession. While this is certainly exaggerated, here are seven more nuanced observations about 'robo-advice'
1. Robo-investors still have a tiny market shareCurrent statistics suggest there’s not that much to worry about, yet. At the moment, online wealth managers in the UK manage just 0.037% of the UK total. In the US, where robo-advice has been around for five to ten years, it’s 1.38%.
2. Robo-investors still have tough barriers to overcomeAccording to David McCann, Analyst at stockbrokers and corporate advisors Numis, “None of the start-ups have yet found a way to overcome consumer inertia, lack of trust/brand name (important when it is your life savings) and lack of understanding of the idea (will people trust a significant part of their life savings to a new idea?).”
3. Clients still want the human touchResearch by ComPeer, which benchmarks wealth management companies, found that two-thirds of people aged over 50 prefer face-to-face meetings as a method of getting financial advice. Among younger people, the proportion was only slightly lower at 58%. Just 5% in the younger category and 1% in the older plumped for an online service.
4. Wealth managers are hedging their betsSome of the largest wealth managers have either bought an automated advice platform, or created one of their own. While some of these may fail to get off the ground, the very pace of activity increases the chances of at least one automated wealth management service achieving mass-market acceptance.
5. We might see a bit of bothVanguard’s Janine Menasakanian thinks the industry might end up using a mix of face-to-face and automated advice, depending on clients’ life stages (advice is generally more straightforward for people in their 30s and 40s, becoming more complex later on). Digital capability could be used to take out the mundane routine tasks in giving advice and helping with decision making.
6. Complacency is the enemyThere’s a risk that clients adapt to technology quicker than wealth managers. This was exactly what happened in the 1990s, when traditional stockbrokers failed to recognise the growing client interest in execution-only business. “None of the big incumbent players did so in a major way”, says McCann. “This effectively allowed newer entrants like Hargreaves Lansdown to enter the market relatively unencumbered.”
7. Clients may focus on cost moreRobo-advisers may encourage clients to focus on costs – and to discover that their bespoke wealth management services come with a significant cost. Numis’ fees analysis shows that the average execution-only platform costs around 1%. Nutmeg’s automated offering costs just 0.69%, while most discretionary wealth managers charge at least 2%. These margins could come under pressure.
The original version of this article was published in the March 2016 print edition of the Review.