W&F Issue 4 2018

www.wealthandfinance-news.com 40 Wealth & Finance International - Issue 4 2018 Robo-advisers may bring to mind a science- fiction future in the vein of Blade Runner or The Terminator, but in the world of finance, it’s already a reality. And not one feared, either. With generally cheaper fees and easier accessibility, robo- advisers have opened the world of investing to a greater audience. Now, as easy as ordering takeaway on your phone, you can expand your investment portfolio. These online investment firms are popping up frequently and growing more popular. Indeed, KPMG research predicts that by 2020, robo- advisers will manage around USD$2.2 trillion (£1.58 trillion) worth of assets in the US alone. It used to be easy for more established players to dismiss robo-advice startups, but this projection tells a different story. Does this growth in popularity spell the end of the traditional financial adviser? What are robo-advisers? A robo-adviser is, at its core, an online wealth manager. It offers mostly the same services as a traditional financial adviser, but uses algorithms and technology to provide financial plans and automatically manage customers’ investments. A questionnaire is typically offered to gain details of your investment time frame, goals and risk profile. Once you’ve invested money, an algorithm generates a suitable portfolio, generally based on exchange traded funds (ETFs). This is then managed by the robo-adviser, re-balancing it when necessary. What is the attraction to them? There is a lot of opportunity in the UK for robo- advice. The traditional model of investing can get expensive, and combined with limited financial literacy and a lack of trust, there’s a significant advice gap. From a survey, Deloitte estimates that there’s up to 15 million British adults who would be willing to pay for automated advice in at least one market. These markets range from simple financial planning and investing, to mortgages and managing their pension. To go into more depth, the Deloitte survey also found that demand for robo-advice was high among those with above average income and those in their early forties. This is despite the fact that millennials are thought to be the most enthusiastic about new technologies, and that those earning a higher income than average would be more able to afford traditional financial advice. Deloitte’s research also found that while consumers are willing to pay for this service, they’re generally not willing to pay very much. The main attraction to robo-advisers is that they’re usually easily accessible, hands-off, and charge a smaller fee. Once the consumer sets up their profile, the algorithm takes care of the rest. The idea is that the algorithm removes human bias and reduces fund management overhead costs. Robo-advisers generally cost around 1% or less, with investment charges on top. They won’t give as thorough, or anywhere near as tailored information as a financial adviser, but instead recommend investment portfolios depending on your situation. Barriers to mass uptake While a lot of these robo-adviser startups are growing strongly, it can be hard for them to balance low fees with actually turning a profit. Nutmeg itself, one of the better-known firms, reportedly found that its pre-tax losses went from £8.9 million in 2015 to £9.3 million in 2016, with its operating expenses increasing from £1.2 million to £11.9 million. Nutmeg’s business model is focused on expanding to as many customers as possible to be profitable. Nutmeg’s Chief Executive told the Financial Times: “We could turn a profit this year if we wanted to, but we’re choosing not to. We’ve embarked on a very bold mission, which is to empower a generation of investors and for us that means not hundreds of thousands of clients like our competitors, but millions of clients.” An important thing to note is that while robo-advice can be more cost-effective, it can’t deal with more complex finances. A robo-adviser will only take the information you give it and formulate a plan based on that. It can’t get into anything beyond the numbers, like creating a plan to pay for your dream house. The Growing Trend for Robo-advice By Jon Ostler, UK CEO of finder.com discusses the growing trend towards automated investment alternatives and whether financial advisers’ days are numbered. Another barrier to consider is that many people might prefer to talk to a financial adviser face- to-face. It can be easier explaining a financial situation to another person, especially things that might not be covered in the questionnaire offered by these robo-advice firms. The Deloitte survey also showed that while there is a strong appetite among millennials to use a digital advice service, they often haven’t accrued as much in savings. In comparison to older consumers, millennials may not be able to pay for advice. Marketing costs for an automated advice service end up being quite high, as their focus is on recruiting more and more customers to balance out the low fees. How will this affect traditional financial advisers? Robo-advisers are filling a gap in the market by opening up low-cost, purely-online, diversified investing to the masses. But can they replace the traditional financial advice model? Not completely. Currently, being unable to provide tailored advice is the main weakness of robo-advice, and the reason why financial advisers won’t become an extinct species anytime soon. You can’t sit down and hash out your goals to a robo-adviser. There is also a certain lack of control that comes with robo-advisers. Customers don’t have the ability to customise their portfolio in any way and have to agree with the investment allocation the robo-adviser uses. Simply put, there’s less investment flexibility. The gap Automated investments have changed the game, but the traditional financial adviser won’t be out of work just yet. Since robo-advice is based just on building and maintaining a portfolio, there’s still a gap for the strategic advice a person can provide. However, for the large percentage of the population who are either unwilling or unable to pay high fees, robo-advisers offer a low- cost alternative for straightforward investment requirements.