After years of regulatory change centred on the retail distribution review (RDR), many organisations are now ready to join the robo-advice revolution.
Having watched the RDR landscape evolve and pioneering technologies develop, the industry is turning its attention firmly towards financial advice provided through digital solutions. The last six months have seen a wave of activity with organisations from big banks to the smallest advisory firms launching new services.
An Ernst & Young report has predicted that 2017 will be a breakthrough year for robo-advice, and that companies that would not have considered it five years ago are doing so now. One thing that will help is the anticipation that, in 2018, European regulations will introduce a right to data portability, allowing customers to consolidate information that was previously dispersed, said EY.
Delegates at The Summit for Asset Management (TSAM), which I attended recently, agreed that robo-advice is here to stay. Some said that organisations are anxious to avoid a ‘Kodak moment’ – a reference to the photo film supplier that did not act quickly enough to defend its business against digital disruption.
Others do not see it in such dramatic terms, but rather as an opportunity to access a new market that digital solutions are opening for the first time.
Potential demand is huge – researcher BI Intelligence predicts robo advice solutions will manage $8 trillion global assets by 2020.
The opportunities for companies in increased speed, efficiency, consistency, transparency and scalability are clear. As such, robo-advice is helping to bring advice to parts of the market that were previously uneconomic to advise. Investors no longer need a minimum of say £100,000 to receive advice – only £1000 or less.
In the UK, estimates of the number of people who need advice but don’t get it range up to 5.5 million. This is often because they think traditional advice is too expensive or they don’t have time. Millions more millennials are also likely to become robo-advice customers in future for similar reasons.
In the US, robo provider Betterment has accumulated $8 billion under management in its first five years. Vanguard’s hybrid robo-human advice service has attracted much more – over $50 billion since launch in May 2015 – by leveraging its existing client base. UK pioneer Nutmeg has amassed £600 million in its first four years. But now, many large UK institutions are grasping the opportunity to use their brand and distribution networks to scale a digital service.
LV= and UBS have been two heavyweight entrants in the last year or two. Meanwhile Nat West, Goldman Sachs and Morgan Stanley all have plans to introduce robo-advice soon. At the other end of the scale, small advisers such as Navigator Financial Planning and Austyn Smith Associates have also launched solutions recently. Other small advisers are using outsourced or white label robo offerings provided by standalone providers, asset managers or back office software companies.
All new entrants face decisions such as whether to offer regulated advice or simple guidance; and whether they want a fully digital offering or a hybrid. Another decision is what areas of advice the service will cover. Investment planning is simpler; retirement planning is harder, but becoming available, with claims of dramatically reduced completion times compared to human advice. Goal-based, life planning elements are also possible.
The consensus is that robo advice is unlikely to threaten the traditional face-to-face market, which mostly now serves the top 10% of wealthy clients who have more complex affairs and need a human touch. But even firms in this traditional space need to consider a robo offering or miss access to this new market – and a potential source of future face-to-face customers. For example, more than 50% of Nutmeg’s customers are first-time investors and some of these might also need traditional advice as their assets grow.
Robo-advice could also allow advisers to service dormant client banks; and children of existing clients.
A report by the Financial Services Consumer Panel has criticised existing robo-advisers for failing to communicate their services and charges properly and for being too confusing.
Beyond this one of the main outstanding challenges for providers is to formulate robo-advice that can give fully digitised, regulated advice in more complex areas while keeping the user engaged – few providers have managed this yet.
Another issue for new entrants is that competition is fierce and profit margins for standalone providers are likely to be tight. New standalone offerings will struggle to compete unless they already have a big brand or distribution network. Competition is set to intensify as retail banks, supermarkets and other consumer brands are still eyeing the market.
Any new service needs a watertight business plan and a clear strategic aim linked to an existing business model.
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