Is Robo-advice the new Airbnb?
Robo is one of the hottest topics being discussed within the industry right now.
With an estimated USD2.2trn of US wealth expected to be invested in the Robo industry by 2020, is this industry the latest innovation product in finance or is it just a fad?
Is Robo-advice the new Airbnb?
Written by Katrina Sartorius, Euroclear, Global Head of FundsPlace
How disruptive is Robo-advice for financial services? This is more than the usual USD 64bn question. An estimated USD 2.2 trillion in US household wealth alone will be managed by Robo-advisers by 2020. Even before then, Robo will be “completely pervasive in the UK” according to one platform builder.
The prime driver is cost: Robo-advice provides individual investors with an online recommendation of allocation to bonds and equities that is cheaper than traditional face-to-face advice. For the mass affluent, that cost saving couldbe more than 1% of their assets a year, or almost 25% over the course of their lifetime saving.
If these predictions come true, then financial advisers and asset managers will experience the same upheaval Airbnb has caused the hotel industry or Über has to licensed taxi drivers.
Not everyone agrees, however, that Roboadvice will be such a disruptive force, as a recent SWIFT panel involving some of the most advanced suppliers to mass-market asset management demonstrated.
The first challenge, from Nick Stebbing, Head of Wealth Client Solutions at Pershing, was on the speed and depth of Robo’s market penetration. He noted that the UK’s leading Robo-adviser, Nutmeg, had not yet translated its first-mover advantage into the level of assets under advice many had predicted. “Savers in Generation X and above have shown a lack of willingness to transfer their entire pension pot to an unfamiliar brand,” he said.
This means that Robo-advisers are competing for these investors’ annual ISA allowance at most, far from a disruptive success. Moreover, unlike Google or Facebook or even Microsoft in the tech generation before, there is not a clear Robo leader. Some of the brightest names have already been snapped up by major asset management houses such as BlackRock and Invesco. This only encourages more start-ups.
Christopher James, Managing Director of FNZ Institutional, reckons it has been approached by 20 this year alone asking for help to establish a platform for their technology. Many are naïve and James points out that they are not competing among themselves. Apart from the giant asset managers such as BlackRock and Invesco, FNZ has just helped establish a new platform for Santander. He said high-street banks are keen to move into this area as they replace in-store human advisers with virtual, online offerings.
Winning enough C’s
All of which suggests a crowded marketplace for a kind of service that has yet to prove its disruptive power. James feared that the universe for Roboadvisers, both large and small, is not as big as their business plans combined project. “Are there enough C’s to go round?” he asked. “We’ve seen this overoptimism before in financial services.” Stebbing added that Robo had thus far not delivered the kind of performance that might pull more assets in. “You might get big transfers if people see returns of 4% but with returns at 120 bps and fees upwards of 100bps, it is just not compelling,” he said.
Performance matters in asset management, whether it is avoiding losses or delivering positive returns. Like many tech business, including Google and Facebook, Robo-advisory relies upon algorithms, mathematical pathways, to determine the best course of action. Where Google evaluates a user’s search history to attract the most appropriate sponsored links, Robo-advisory subtly evaluates onscreen activity in order to recommend sensible portfolio allocation.
Neuro-linguistic programming can be harnessed to ascertain better what clients really want. But as Stebbing suggests, evidence of Robo’s superiority as a form of advice and asset allocation has not yet appeared.
Phil Goffin, director of IFDS Innovate, was pretty blunt the reasons why, dismissing the first generation of Robos’ offerings as ”pretty basic” and “not much more than auto-form filling”. His concern was that some of the Robo strategy labels such as ‘conservative’ simply put folk into 100% fixed income funds. “There is a dearth of choice. People need to be able to differentiate between propositions,” he said.
James shared these worries. He feared that offering just eight different portfolios to an entire range of clients – as some Robo-advisers do today – might not ultimately be satisfactory. From the providers’ standpoint, he noted that half of the platforms currently up and running in the UK – from the Telegraph
Investor portal to Hargreaves Lansdown – did not make their money from advice but instead concentrated on execution business.
If the panel were unimpressed with Robo’s advances hitherto, Goffin was bullish on its capability to improve. His expectation was that as technologies such as Artificial Intelligence progresses, they can be incorporated into personal investing so as to make Robo truly smart and foster differentiation. This ought to extend to risk tolerance because internet technology, including data collection, facilitates a much more profound and dynamic characterisation of each individual than existing questionnaires. Goffin said that banks could be victors here “if they got their act together”. Otherwise, he sees successful disruption coming from outside the traditional asset management industry, although not necessarily from outside the financial services sector.
Stebbing doubted whether Robo can really close the ‘advice gap’ exposed by the ban on commission-based advice in the UK and increasingly emulated across Europe. He was adamant that folk are better off with a decent adviser (research by Pershing suggests a difference in wealth of 300%). But he recognised that advisers’ fees were dissuasive for the mass affluent.
Stebbing predicted the likely victors will be huge US asset managers such as BlackRock and Vanguard, which have found a way to make low-cost passive asset management a successful business. “They have found a cost-conscious way to make money that UK-based managers are still grappling with.”
Slimming the lion
The panel were unanimous, however, that costs will come down. Goffin reckoned that all-in costs for personal investors could be as low as 40 bps in the near future. This will be due to the pressure of
the giants – he pointed to Vanguard’s recent launch of four actively-managed ETFs for 22 bps – as well as the growing use of ETFs, Robo and technology in general.
James said that active asset managers complain about the price of agency services along the investment chain while they still account for the lion’s share of total expense.
An industry on the block?
Apart from traditional asset managers, the one group Stebbing believed to be under most commercial pressure was retail transfer agents. Several of these, however, are transforming themselves into D2C platform providers, where business is plentiful. But Goffin reckoned that technological innovation would sweep away many links in the chain as well as cost of blockchain.
“The current kind of performance enhancements we are talking about here would amount to 5-6% industrywide,” he said. “Blockchain would be seismic and produce up to 50% performance enhancement.”
Because blockchain involves values of any currency or asset there would be no spreads or intra-day pricing (or attendant hedging and arbitrage). In a system operating on blockchain, every participant in that system has the master copy of their assets, hence no need for repositories, clearing houses or custodians.
Will it happen? Goffin reckoned the way forward would be via lots of private groupings operating between themselves, a bit like trading on private exchanges (dark pools) currently. And he admitted that regulators would like some kind of oversight. This was a major sticking-point for Stebbing. “Regulators like to hold
someone to account,” he said. “I don’t see a blockchain revolution any time soon. Like a lot of technology, it is a solution looking for a problem. I expect that it will remain something esoteric for a good while yet.”