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Robo wealth managers — the future or just a fad?

‘Robo-advice’ via algorithms is catching on in wealth management — but is it safe and responsible yet? Tanzeel Akhtar investigates.

The rise of automated advisory is prevalent throughout the global wealth management sphere, and it is here to disrupt the financial services landscape. A few years ago the thought of asking an algorithm how to manage or where to allocate your money for better returns would have been an absurd concept. Now, as efficient technology is developed and adopted by financial institutions, does it have a future in wealth management or is it just a fad?

‘In the medium to long term, as technology improves, people will become more comfortable with robo-advice services. But even then, many people will want a mix of services and the reassurance of being able to call a professional adviser or have an adviser check the output,’ says Steven Levin, CEO of Old Mutual Wealth’s investment platforms.

If an algorithm can help achieve higher returns and provide assistance at a low cost, why not give it a try? Many people might find the thought of trusting a robot with their money a little unsettling at first. The important question is just how reliable financial advice given through a bot is. Many people may even consider them a threat to the role of the traditional financial planner in wealth management.

Over centuries, it has been the tradition for those who accumulate wealth to seek a qualified adviser (in the human form) for financial recommendations, usually given face to face in an office environment. The adviser would then charge the client for his or her time. This scenario is being disrupted with the introduction of digital technology claiming to know how to handle money in a mechanical and more
efficient way.

Not everybody is welcoming of the change. Gina Miller of SCM Private is concerned that if we are not careful how these new robo-advice models are presented to investors, it could be the next big mis-selling scandal. ‘The simple test is if it looks and feels like advice, it is advice,’ she says, ‘yet many of these new operations are not following the advisory regulation, professional indemnity insurances or other requirements.’ Speaking from first-hand experience, Miller says that since launching SCM Direct in September 2014 she has found HNWs are willing to adopt online investment management, with the average online client size being £330,000, but when they require advice their preference is to see an adviser face to face.

‘When you look at the websites for many of the new “robo-advisers”, they are not being pitched to HNWs in terms of tone, content, design or language,’ she says. ‘Our client feedback is that many do not feel they appeal to them as HNWs, but they would to their children.’

The findings of a recent global asset management survey conducted by asset management group Legg Mason correlate with Miller’s observations — the younger generation dubbed as the ‘millennials’ are more readily embracing robo-advice. Out of the 1,000 participants who took the survey, 85 per cent said they were comfortable with robo-advice, while 80 per cent said they trust the advice.

Legg Mason says robo-advice is more than a passing fad. However, financial advice is complex and not always straightforward. A recent report by Old Mutual Wealth suggests that as UK customers become wealthier, the majority will look for and prefer human interaction.

Joe Mansueto, CEO of the US investment management company Morningstar, wrote in a recent blog that it is hard for a computer algorithm to take into account the multitude of possible individual situations and create a plan in a way that engenders ‘trust’. Emphasising that the emotional and behavioural aspects to investing are very important, he wrote: ‘If the market plunges, investors often want to speak to someone. Logging on to a website and interacting with an online tool may not suffice. The future of the financial advisor is secure and arguably more important than ever.’

In the US, firms such as Betterment and Wealthfront have been pioneers of robo-advice services. Betterment was launched in 2010 and now manages more than $3.2 billion; Wealthfront was launched in 2008 and manages over $2 billion. Recent notable launches include Vanguard Personal Advisor Services. With large players adopting tech-driven advice, there is no denying demand and adoption.

‘Another example is the more recent Schwab proposition, which delivered $2 billion assets under management within a matter of weeks of launch,’ says Levin. ‘While a large amount, it is still only a fraction of the $25 trillion-plus US savings and investments market.’

In the UK, London-based online investment management service Nutmeg was launched in 2011, managing wealth for a ‘small transparent fee’. Another recent new entrant in London includes German start-up Scalable Capital, which has been launched by a group of former Goldman Sachs employees. Scalable Capital has just received FCA approval.

There are plenty of small start-ups entering the wealth management space with bright new tech featuring financial technology claiming to offer services which can help deliver exceptional returns at low costs. It is important to do your due diligence beforehand and check the firm is fully regulated by the FCA before handing over your money.

If the introduction of robo-advice hits the UK market and becomes a successful alternative to face-to-face advice, this could have a major impact on the IFA market. There are many ongoing concerns in the current marketplace. Miller says it is ‘scandalous’ that some of these new robo-advice start-up entrants are being allowed to ‘bend’ existing rules in the name of innovation.

‘There are terms being allowed such as ‘light touch’, ‘simplified advice’ and ‘guidance’, none of which are allowed according to the FCA handbook,’ she explains. ‘Against that, it is often unclear where the boundaries lie between a personal recommendation and information/execution only, and whether this is transparent enough for the end-user.

‘They [robo-advice start-ups] are failing to carry out the same level of due diligence authorised advisers have to conduct, by the very nature that they are working off questionnaires filled out electronically that largely go unchecked to see if the information is accurate. Furthermore, the FCA itself has raised serious concerns about risk analysis tools, finding that only two out of twelve were fit for purpose but failed to say which two.’

There is clearly still a long way to go before winning over traditional players in wealth management. However, for the new tech-savvy generation, where apps are a part of everyday functioning, advice from a bot will be the norm. There will, it seems, be no ‘trust issues’ for the younger generation when considering robo-advice.