Don’t panic! The future of robo-advice isn’t what you think
We’re in the midst of a robo-advice revolution, but the end isn’t nigh for the flesh-and-blood adviser.
By Miranda Slade
IT is easy to be infected by the moral panic that automated interactions are making human communication obsolete. This year a man did marry a robot he built himself, after all. The reality is that while ‘Robo-advisers’ may sound like scary humanoid cyborgs; working with them will only enhance the customer service offered by the best financial advisers.
What are they?
Robo-advisers were launched following the financial crash in 2008, appealing to a desire for greater transparency following a loss of faith by consumers in financial services. An online investment service asks questions, then puts together a profile based on your answers and directs you to investments it judges you will be interested in. From there on in, it manages investments.
In the last few years adoption of robo-advisers has escalated rapidly. Business Insider Intelligence predicts robo-advisers will manage around 10% of all global assets under management (AUM) by 2020, worth approximately $8 trillion.
Many have attracted attention — and acquired funds — from big scale investors. Last week, Aviva agreed a majority stake in Wealthify; a robo-advice investment business.
Scalable Capital is backed by BlackRock and has headquarters in London and Munich. It launched in the UK in Summer 2016. In the first three months of 2017 alone, they doubled their AUM to €200 million (£172m). This month they reached €500 million (£443m) in assets; growing five-fold in 10 months.
Some banks are even producing their own robo-advisers. HSBC recently unveiled a personalised online service delivering low-cost investment help for people with savings under £15,000.
Targeting those with more modest investments is part of robo-advisers’ appeal. They have the potential to reduce the ‘advice gap’: the name given to those who want to invest without paying for personal advice.
Do investors want it?
Despite encouraging growth, data suggests that clients are wary of robo-advisers.
A survey by Dutch bank ING asked 15,000 people across 15 European countries (1,000 of whom were British) and found that 91% would not let a robo-adviser make independent decisions about their finances. 36% of people didn’t want any automated financial activities. ING found only 3% of interviewees were willing to rescind control over their finances to a robo-adviser.
This same study found that 40% of people seeking investment advice spoke to a human financial adviser, with 14% speaking to their friends and family. Their behavioural science specialist observed that on a fundamental level, ‘many people are reluctant to give up control of these decisions’.
Could it be the case that robo-advisers leave customers feeling dehumanised?
The selling points of any form of financial advice emerged as personalisation and convenience, and many customers remain anxious about how digital financial solutions might be using their personal information. These customers will perhaps not be reassured by the development of Customer Relationship Management systems capable of analysing data from a client’s social media activity in order to determine their investment goals.
What emerges is an uncomfortable juncture for digital finance. When it tries to deliver on personalisation it begins to encroach upon what customers perceive as personal security. This implies that the personal touch of a financial adviser to reassure the customer paired with the advanced technology of the robo-adviser is the gold standard — digital efficacy meeting with human affinity.
Baby Boomers v. Millennials
Comparing the figures from ING’s survey with findings from the Legg Mason Global Asset Management survey poll of over 1000 investors illuminates the dividing lines across their clients.
Legg Mason found that in the age group 18–39 85% of investors said they felt comfortable with robo-advisers. The same question was posed to the group aged 40–75 and the percentage plummets to 37%.
Online wealth manager Nutmeg claimed this week to have grown in AUM by 67% from £600 million to over £1 billion this year. Customer numbers have doubled from 24,000 to 49,000. High marketing costs ate into Nutmeg’s profit; it is clear that their focus is signing up new customers.
Moreover, the chief executive of Nutmeg told the Financial Times their client’s average age was 41. Scalable’s was aged 50; and two thirds of them came from an economics or tech background. This hardly constitutes breaking into a market unfamiliar with financial services.
PitchBook estimated that $11.4 billion has been invested by venture capitalists into asset managers they believe will be popular with millennials, particularly ‘passive products’. Some asset managers are targeting the younger market by developing incentives like “outcome funds” to save towards a particular goal; like buying a house.
The number of millennials and their willingness to share information means they remain a fertile market. Some observers warn that financial services are still recovering their reputation among those most affected by the 2008 crash.
How to make it work?
In a speech given last month at the 2017 Annual Conference on Robo Advice and Investing the FCA head of strategy Bob Ferguson reported that the biggest area of feedback for them was being asked about combining human intervention with automated advice processes.
The rapid growth in customers signing up to these services tells a story. Fintech provides an easy route in for new customers. For this reason, traditional companies need to embrace the way the new technology is disrupting the industry.
Fintech can also save financial advisers precious time and resources, which will allow them to look after more clients and to be more attentive to their specific needs and behaviours. When implemented well it offers more agency to both adviser and client.
This technology can also aid advisers in organising when, and how, to talk to a client. Calling hundreds of clients to talk through their investments once would have taken a fortnight; an outdated communication system will never keep pace with the market, especially during periods of volatility.
Advisers should see this as an opportunity to meet clients who may need long-term advice. Younger generations using fintech may be reimagining pension schemes in the future. Established brands can lend credence to the digital platform while robo-advisers modernise the traditional face of personal advice.
The roll out of this technology in its infancy has already presented financial advisers with key insights. We know that customers value transparency and being able to see their invested assets. We have also been assured that the capabilities of automation do not satisfy the customer’s need for communication and trust with their adviser.
