“Simple fees,” boasts one robo proposition. “No hidden charges,” says another. “Straightforward. How fees should be,” a third exclaims. “Fees with nothing to hide…” When you think more about the market, it’s apparent the robos have it wrong.
Take fees and transparency. Only 3 per cent of British adults who do not invest say it’s because it’s too expensive. Transparency will only hit home with the 6 per cent who say they “don’t trust financial institutions to look after their money”.
Instead, at the top of the list of barriers to investing is the traditional answer: “I don’t have enough disposable income to invest”. This is quickly followed by: “They are too risky.” So the algorithms are attacking the wrong problem.
These results are from Platforum’s latest round of research with British adults. In our survey we asked those who don’t invest, why not? Just over one fifth say they don’t invest because of the risk involved.
How many people would buy lottery tickets if they were first shown a disclaimer that read: “You have a one in 45 million chance of winning the jackpot”?
I adamantly believe the disclaimers on investments are too prominent – it places the focus on risk versus reward, which plays into the fears that investments are “too risky”. While UK savers have around €2trn in deposits, they have €947bn in investment funds and shares. Platforum’s latest research with investors confirms that only 5.5 per cent of UK adults invest in funds.
Is there a way to change the conversation about risk and reward to address people’s fundamental concerns that they can’t afford to invest and that they might lose some of their principle investment if they do?
Front and centre on Nutmeg’s homepage: “Get an intelligent investment portfolio. With investment, your capital is at risk”. Investors’ top goals are to feel financially secure and to save for their retirement. Getting an intelligent investment portfolio doesn’t figure at the top of the list. The focus on risk feeds investor fears.
Most robos concentrate their customer engagement on attitude to risk questionnaires to recommend a portfolio. The regulator requires a thorough review of attitude to risk but it needn’t overshadow the entire process. Shouldn’t we also help people decide how much they can afford to invest and whether that money should be in an Isa, Lisa or Sipp?
And money changes hand at the point of the transaction – suggesting the value is in the transaction.
Where robos are getting it right and what more they should do
Some robos are turning their attention to helping advisers increase efficiency. We think the biggest opportunity to increase availability of advice in the medium term is to increase the number of clients per adviser. Currently on average individual advisers work with about 150 clients.
Some robos are interested in working with advisers. This will help the robos achieve some scale – customer acquisition is expensive and difficult – and will help advisers increase capacity.
It will be difficult to automate the advice process but aspects of it can be made more efficient. In particular, open banking standards will mean that cash flow modelling tools should be able to offer useful automated analysis of spending habits.
Robos should be integrated with engines to buy and manage investments making rebalancing a breeze. Robos should help investors make decisions about the best tax wrappers for investing.
Finally, we also think there is a big opportunity to help investors and advisers navigate the complexity of drawdown. Robos should be able to help people decide the most efficient way to draw capital from various tax wrappers and investments.
Here’s the reality that the robots have yet to decrypt: robo-advice only works when you put people at the heart of the offering.
Heather Hopkins is head of Platforum