Here we go…
I wrote a short article earlier this year on robo advice and the rise of the cyborg, but given the acceleration of robo in the UK market and plans for more platforms and adviser assisted robo solutions, I thought I would pen a bit more on this subject.
Robo-advisors are now a class of financial adviser generally providing financial advice, guidance or asset/portfolio management online with a varying degree or minimal human intervention.
They provide digital financial advice based on mathematical rules or algorithms. These algorithms are executed by software and thus financial “advice” do not require a human advisor. The software utilises its algorithms to automatically set-up, allocate, manage and optimize clients assets. Common examples now are in the simpler ISA space.
This does however raise the question of differences between “advice” and simply “guidance”, with legal and regulatory implications, between the two. Some people also say that robo is going to lead to the next big miss-selling scenario, if perhaps consumers are driven to a pre-defined solution which may not be suitable. Others, say that the mass market needs low cost (and direct) solutions since most consumers aren’t able or willing to spend on the cost of face-to-face advice.
Robo-advisors emerged around 2008 with an initial greater presence in the United States and other countries. Today there are over 100 robo-advisory services and growing. Investment management robo-advice is considered a breakthrough in the formerly exclusive area of wealth management services, bringing them to a broader audience with lower cost compared to traditional human advice. Robo-advisors typically allocate the consumer assets on the basis of their individual investment, risk preferences, and desired target return. Clients can choose between offerings with passive asset allocation techniques or active asset management styles and a range in-between.
The term “financial advisor” typically applies to any entity giving advice. Most robo-advisor services seem to be currently limited to providing portfolio/asset management (allocating investments among asset classes) without addressing issues such as estate and retirement planning and cash-flow management, which are also the domain of financial planning. These areas still really do require proper discussion and advice and it’s doubtful that robo will ever be able to truly replicate this.
Other designations (and there are many…) for these financial technology (adviser) companies include “automated investment advisor”, “ cyborg advice”, “automated investment management”, “online investment advisor” and “digital investment advisor.”
A bit of background
While robo-advisors are most common in the United States, they are also now present in Europe, Australia, India, Canada, and Asia. In the UK we are now seeing a rapid growth and various propositions beginning to emerge.
Without doubt, many if not all of the UK banks and major providers will set-up some sort of robo solution for their massive customer base over the next few years – battle of the Transformers is really on….
In actuality, the tools they employ to manage client portfolios or provide comparison analysis differ very little from the software and stochastic tools already widely used for many years, in the profession behind the scenes. The main difference is in distribution channel. Until recently, portfolio management (and product selection) was almost exclusively conducted through human advisors and sold in a bundle with other services. Now, consumers have direct access to product selection, comparison and portfolio management tools.
The customer acquisition costs and time constraints faced by traditional human advisors have left many consumer investors (mass market as its sometimes called) unable to obtain some of these services because of the minimum level of investable assets required by the adviser. The average financial planner would seem to have a minimum investment amount of around £50,000 (some advisers will do lower and for existing clients) while minimum investment amounts for robo-advisors can start as low as £500. In addition to having lower minimums on investable assets compared to traditional human advisors, robo-advisors charge fees ranging from 0.2% to 1.0% of Assets Under Management, while traditional financial planners charged average fees of around 1.5% of Assets Under Management. This of course varies depending on how an investment is set up, the cost initially and the on-going servicing.
In the United States, robo-advisors must be registered investment advisors, which are regulated by the Securities and Exchange Commission. In the UK they are regulated by the Financial Conduct Authority.
Current research would indicate that only 10% ish would be prepared to give up control of their money to a computer. Same as would you get into a computerised car with no driver? At this stage both are embryonic and not fully tested over time.
For some things or elements nothing can replace the human factor!
However, over time, robo advice will become more familiar with people and like always, once people are comfortable, initial reservations and concerns will dissipate. So initially (as with the computerised car) human intervention will be common with robo, but in the end that 10% could easily and is likely to become 90%.
I will update more on this subject since it interests me a lot and its a fundamental shift in the way of doing things, especially regarding “packaged” investments and pensions.
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