With the announcement of the UBS robo-advice service’s launch next month, the world of fintech has been buzzing around this topic more than ever. It seems that big players become less sceptical about digital investment management in the effort to capture their part of a growing market. UBS in particular has invested $1bn in a strategy that aims to attract younger clients to its flagging wealth management business.
Robo-advice services are spreading around the world with its main epicentres located as usually in the US, but also in the UK and Europe. Pioneers from Silicon Valley, such as Wealthfront and Betterment, were followed by dozens of start-ups at home and abroad. The most well-known include MoneyFarm launched in 2012 in Italy, British Nutmeg (2011), German Scalable Capital (2014) and Cardiff-based Wealthify (2014). Although, the industry has been gaining more attention mainly thanks to established asset managers, who have made the move towards digitalization. For example, BlackRock, the world's biggest fund manager, last August bought platform FutureAdvisor and in December Deutsche Bank launched its own robo-advisor for equity investors, AnlageFinder. Other companies like Charles Schwab and Vanguard have built their own in-house online wealth-management services.
According to Citigroup, assets managed through robo-advice companies could reach $5tn over the next decade. Meanwhile, Business Insider in its recent report on the robo-advice industry suggests even a higher number: up to $6tn. However, it is not always easy to make consistent predictions, as the range of the services offered under the hot “robo-advice” name makes it difficult to define the term. Sadly for technology geeks, there are no actual robots involved – the closest you get is algorithms. After a client answers a set of questions online, aimed at measuring his goals and risk appetite, the algorithm makes a recommendation on the portfolio to invest in. Some platforms are limited to the advisory, a majority though can execute the choice and invest on client’s behalf.
One of the motivational factors to develop robo-advice services is a “financial advice gap” reported by the Financial Conduct Authority. It claims that up to 16 million people in the UK need the advice but can’t afford it. Founders of Scalable Capital agree with the FCA. They left Goldman Sachs’ Capital Markets division to start up the company because they were tired of friends’ and relatives’ questions regarding where to invest. “We all came together and said, I just don't have an answer to that question."
There are several reasons for Fintech to fill this gap. One is trust, as many millennials would rather invest based on YouTube recommendations, than on those given by their bank manager. The main one, however, is cost. In general, robo-advisors not only charge much lower fees, but also have significantly lower minimum investment requirements. Even the hybrid models that combine automated and human advice, developed for example by Vanguard and Morgan Stanley, reduce the labour costs for the provider and allow him to offer the product at a lower price.
Automated online investment services typically use passively managed exchange traded funds as building blocks of their investment portfolios. This goes in line with the trend among investors to favour cheaper passive products, as actively managed funds on average continue to underperform.
Nevertheless, it is important to remember what stands behind such advice. The main critique of the service emerges from the fact that it’s not really advice. If the platform consists of six to seven portfolios, the clients have to find their way into them. Therefore, a lot of people are getting advice that is far from being bespoke. Not only robo-advisors fail to sufficiently differentiate investors based on their risk profile, they also don't get involved with the more personal aspects of an investor's situation, such as taxes, retirement, or estate planning.
“Do not underestimate the value of a customised approach for wealthier clients in ensuring they mitigate potential exposure to capital gains tax or inheritance tax, as the benefits from tailor-made investment management can be very considerable,” says Jason Hollands, managing director of Tilney Bestinvest. “People who say robots will wipe out human stock pickers are wrong. What they will wipe out is bad stock pickers,” he says.
The future of robo-advice largely depends on two factors. One is the performance. Because of Allianz’s acquisition of a stake in MoneyFarm with the intention to develop and implement Artificial Intelligence in its robo-advice service, the outlook becomes more promising. The second factor is profitability. Losses at Nutmeg underscore the challenge of attracting enough funds to cover high clients acquisition costs. A study, published this summer, said the average UK robo-advisor receives revenue of just £147.50 per year per customer, but the cost of acquisition was at least £180 annually per account. This is where renowned asset managers could gain their competitive advantage and therefore boost the industry.
Even though currently robo-advice represents only a tiny fraction of investment management, it has been clearly gaining more trust both from asset managers and their clients. At the very least, it is already changing clients’ expectations around fees and costs. All this signals a possible shift in the industry that robo-advice can cause.
Katrina Matyukhina
Robo-advice services are spreading around the world with its main epicentres located as usually in the US, but also in the UK and Europe. Pioneers from Silicon Valley, such as Wealthfront and Betterment, were followed by dozens of start-ups at home and abroad. The most well-known include MoneyFarm launched in 2012 in Italy, British Nutmeg (2011), German Scalable Capital (2014) and Cardiff-based Wealthify (2014). Although, the industry has been gaining more attention mainly thanks to established asset managers, who have made the move towards digitalization. For example, BlackRock, the world's biggest fund manager, last August bought platform FutureAdvisor and in December Deutsche Bank launched its own robo-advisor for equity investors, AnlageFinder. Other companies like Charles Schwab and Vanguard have built their own in-house online wealth-management services.
According to Citigroup, assets managed through robo-advice companies could reach $5tn over the next decade. Meanwhile, Business Insider in its recent report on the robo-advice industry suggests even a higher number: up to $6tn. However, it is not always easy to make consistent predictions, as the range of the services offered under the hot “robo-advice” name makes it difficult to define the term. Sadly for technology geeks, there are no actual robots involved – the closest you get is algorithms. After a client answers a set of questions online, aimed at measuring his goals and risk appetite, the algorithm makes a recommendation on the portfolio to invest in. Some platforms are limited to the advisory, a majority though can execute the choice and invest on client’s behalf.
One of the motivational factors to develop robo-advice services is a “financial advice gap” reported by the Financial Conduct Authority. It claims that up to 16 million people in the UK need the advice but can’t afford it. Founders of Scalable Capital agree with the FCA. They left Goldman Sachs’ Capital Markets division to start up the company because they were tired of friends’ and relatives’ questions regarding where to invest. “We all came together and said, I just don't have an answer to that question."
There are several reasons for Fintech to fill this gap. One is trust, as many millennials would rather invest based on YouTube recommendations, than on those given by their bank manager. The main one, however, is cost. In general, robo-advisors not only charge much lower fees, but also have significantly lower minimum investment requirements. Even the hybrid models that combine automated and human advice, developed for example by Vanguard and Morgan Stanley, reduce the labour costs for the provider and allow him to offer the product at a lower price.
Automated online investment services typically use passively managed exchange traded funds as building blocks of their investment portfolios. This goes in line with the trend among investors to favour cheaper passive products, as actively managed funds on average continue to underperform.
Nevertheless, it is important to remember what stands behind such advice. The main critique of the service emerges from the fact that it’s not really advice. If the platform consists of six to seven portfolios, the clients have to find their way into them. Therefore, a lot of people are getting advice that is far from being bespoke. Not only robo-advisors fail to sufficiently differentiate investors based on their risk profile, they also don't get involved with the more personal aspects of an investor's situation, such as taxes, retirement, or estate planning.
“Do not underestimate the value of a customised approach for wealthier clients in ensuring they mitigate potential exposure to capital gains tax or inheritance tax, as the benefits from tailor-made investment management can be very considerable,” says Jason Hollands, managing director of Tilney Bestinvest. “People who say robots will wipe out human stock pickers are wrong. What they will wipe out is bad stock pickers,” he says.
The future of robo-advice largely depends on two factors. One is the performance. Because of Allianz’s acquisition of a stake in MoneyFarm with the intention to develop and implement Artificial Intelligence in its robo-advice service, the outlook becomes more promising. The second factor is profitability. Losses at Nutmeg underscore the challenge of attracting enough funds to cover high clients acquisition costs. A study, published this summer, said the average UK robo-advisor receives revenue of just £147.50 per year per customer, but the cost of acquisition was at least £180 annually per account. This is where renowned asset managers could gain their competitive advantage and therefore boost the industry.
Even though currently robo-advice represents only a tiny fraction of investment management, it has been clearly gaining more trust both from asset managers and their clients. At the very least, it is already changing clients’ expectations around fees and costs. All this signals a possible shift in the industry that robo-advice can cause.
Katrina Matyukhina