Having robots do the thinking for us isn’t new. Satnavs tell us how to get from A to B. A plethora of apps teach us how to run 5K, how to take the perfect picture, or which holiday is right for us. But as automated advice and investment services proliferate, is it possible for a pre-programmed algorithm-driven offering to provide a satisfactory halfway house between execution-only services and full financial planning?
Conceived in the US, robo-advisers are expected to manage around $2trn (£1.2bn) in assets by 2020 in that country alone.
In the UK, Nutmeg is the highest profile automated investment service to date, advertising a fee to cover both portfolio modelling and platform services starting at 0.6 per cent for a portfolio of £100,000 falling to 0.3 per cent for £500,000+. That’s a challenging economic model for any advice firm to compete with.
The ability to scale up allows these services to accept smaller portfolios and therefore reach a potentially wider audience. It’s no surprise therefore that the new Treasury and FCA review into the advice gap intends to focus heavily on the role that automated services could play.
The robo opportunity
So, should robo advice be perceived as a threat to your business? Or is it actually an opportunity to run a more efficient and profitable business model – possibly even one that delivers a more personal and enjoyable client experience?
Mapping out all of the processes your business has to perform in order to deliver a compelling client experience will enable you to determine which ones could be automated, and which require the skill and engagement of human interaction. Segmenting your clients into those with limited and fairly routine financial needs and those with complex financial planning requirements may also reveal an opportunity to expand your suite of services.
When individuals experience a particularly challenging life event, such as bereavement or divorce, would an algorithm-based service have the ability to deliver empathy, reassurance and ongoing support? Unlikely. Could a robot show an investor how to make the best of the new pension freedom rules? Probably not.
However, those with lower levels of investible assets and a basic financial need for long-term saving may prefer to pay lower charges for an automated approach. Lacking the confidence to be completely self-directed, these clients might welcome the lighter touch of a pre-programmed approach. The point is, they would have a choice.
The future for financial advice certainly lies in harnessing technology to help firms reduce costs, build scale, increase productivity and access a wider audience – in particular, providing an entry point with young consumers.
But the premium services with the highest client retention and satisfaction are likely to be those that integrate multiple strands: a self-directed microsite for confident execution-only clients; robo-advice for smaller portfolios and simple financial needs; and highly qualified advisers to address the more complex, nuanced, emotional aspects of financial planning.
Through this multi-channel approach, firms will be better placed than ever to appeal to a broad range of client needs, budgets, capabilities and life stages. The machines aren’t necessarily taking over, but they could provide a helping hand.
Liz Pemberton is head of platform consultancy at Cofunds.