Accessing the mass affluent through online platforms that provide investors with automated investment advice based on their individual, self-determined investment goals and risk profiles that creates a bespoke wealth management service at a very low cost.
Robo Investing is the use of automated risk management algorithms to arrive at investment decisions to construct a portfolio of investments for a retail investor. The construction of an investment portfolio is generated based on a series of investment goal and risk profiling questions answered by the investor through an on-line front end platform. Portfolios are typically made up of passive investments, normally ETFs. Providing automated investment advice is designed to provide benefits including cost savings and low minimum investment thresholds to the investor. The investments in the portfolio are automatically rebalanced to keep in the bounds of the individual investor’s investment goals and risk profile.
What are the Benefits?
So far we have seen this service being offered by start-up companies hoping to disrupt the wealth management landscape as well as offerings from existing legacy Asset Managers. Whether start-up or legacy player, both groups have so far gathered substantial assets under management and this form of investing clearly appeals to retail investors. There are four main reasons for this:
1. Low Cost of Investing – by automating large parts of the investment process, and by investing in ETF’s, providers are able to offer a bespoke wealth management service to investors at a very low cost. Annual management fees are also kept low due to the benefits of automation and the compounded performance effect of low fees is marketed as an investment advantage to the investor.
2. Low Minimum Investment Amount – prior to this service being offered, if investors wanted a wealth manager to manage a portfolio on their behalf then the minimum investment amount required was traditionally quite large. The reason for this is the high overhead costs associated to the business models of traditional wealth managers. This was due to a relatively expensive, manual, human based, approach to investment advice and the associated investment process. Typically, a traditional wealth manager might have a minimum entry amount of c.£250k, whereas an investment portfolio through a Robo-adviser can have a minimum entry amount as low as c.£1k.
3. Management Convenience – investors' portfolios are automatically rebalanced at regular intervals on their behalf by the provider to ensure their portfolio remains consistent with their investment objectives and risk profiles.
4. Customer Experience – access to investment advice through these digital platforms is often perceived by investors as being more modern and convenient. Rather than a time consuming and expensive face to face meeting with an investment advisor, investors are able to participate in the investment process and monitor their portfolio at their convenience. Additionally, investors have the ability to set up regular contributions by direct debit or, to instruct ad-hoc contributions or withdrawals. All this can be done at their leisure either on-line or through mobile apps.
So what does this mean for Asset Managers?
Following recent UK legislation around RDR, retail investors have been more reluctant to pay for investment advice. As a result, investors have tended to hold cash rather than purchase investment products. Robo-adviser platforms are proving to be a convenient solution to this problem for Investors and a popular way for Asset Managers to connect with new customers and gather additional assets. Due to the low minimum threshold amounts and low management costs, Asset Managers can now access and service the ‘Mass Affluent’ Investor market in a cost effective manner. Investors seem to like Robo-adviser platforms. They can utilise tax efficient investment vehicles such as ISAs and Pension Fund allocations and this in turn represents additional revenue channels for Asset Managers. Fund houses are now able to win a share of the fees that traditionally went to financial planning advisers. Low cost investment services through mobile digital platforms are additionally attractive to Millennials who remain a relatively untapped client base. Gaining market share amongst this generation can be very advantageous for Asset Managers. Clearly customer loyalty still exists whatever the generation, so having a Robo-advisory presence and not missing out on unharvested assets is extremely important for any Enterprise’s future success.
How Robotic is ‘Robo’?
Although the term Robo-adviser is used generically, it is worth pointing out that the automated robotic elements differ between providers. Some are fully robotic and some are made up of a Robo/human hybrid platform. Often the front end interaction with the Investor tends to be fully robotic but, the back office and dealing of investments can be robotic, human or, a Robo/human hybrid model. Most providers have a call centre helpdesk operated by human workers should they be required. The core investment management decisions continue to be managed by human workers. Although, as this is an evolving model, it may not come as a surprise that at some point in the future, elements of the core investment management process will be automated.
Conclusions
Whether start-up disruptors or legacy Asset Managers, all of the platforms launched so far have gathered significant amounts of assets. The disruptors have picked up and connected with a sector that was previously not being very well serviced, the mass affluent. The key point being that through the application of automated technology and associated low costs, both Investors and Providers stand to gain from the investment process. The real success stories however, have been from the platforms launched by established names, Vanguard’s Robo-advice platform reportedly* grew to run $32bn of advisory assets by the end of its first full year. This indicates that an established and trusted name still curry’s favour with Investors. Indeed, Blackrock, Fidelity, Deutsche and Invesco are all planning to launch or, have recently launched platforms of their own.
Next Steps
So how should Banks and Asset Managers take this forward? Does it make sense to build a Robo-advisory platform from scratch or, would joining an established platform be a better option, thereby taking away technology maintenance overheads? Alternatively, some Financial Services Enterprises have opted to acquire platforms from start-up companies, Blackrock bought ‘FutureAdvisor’ in August 2015. Ultimately, how Enterprises progress should be carefully considered. Actual Intelligence can assist in the assessment, implementation and evaluation of Robo-advisory platforms to help clients unlock the potential gains from this new revenue channel.