21 May The Human Touch
Photo by johnhain from Pixabay
I was interested to read in the Financial Times last week that Investec has become the second asset manager in less than a year to close its online robo-advisory service after finding that the appetite for its service was much lower than anticipated (UBS closed down their offering in the UK last August). They have written off more than £20m in operating losses and software costs in the process.
I remember when ‘robo-advice’ first launched in the UK, to great fanfare. Investors would no longer have to pay a financial adviser to assist them with managing their money; it would all be taken care of by algorithms, at very low cost.
At the time robo-advice was hailed as being a massive threat to financial advisers, the implication being that clients would abandon their advisers in droves, and those who might previously have sought their advice would now choose a digital offering instead.
Well, robo-advice platforms have certainly lived up to their promise of providing a low cost investment platform and the use of technology to suggest an asset allocation to their users, but there’s little evidence to suggest they’ve fulfilled the ‘advice’ part of their offering to the satisfaction of their clients.
Most robo-advisers at launch provided no ‘advice’ in the sense in which those of us who do provide advice define it. There is no personal element to the process – the use of algorithms means you answer a series of questions and get allocated to a ‘box’ containing other people who answered the questions in the same way as you. But most of these algorithms only scratch the surface – no two people’s circumstances will be the same – so the price of lower costs often means accepting a cookie cutter solution.
One of the largest robo-advisers, Nutmeg, saw its losses increase to £12.4m in 2017, up almost 32% on the loss posted in 2016. That was in spite of a healthy increase in assets held on its platform. In other words, it seems to be that the more money they were taking on, the more money they were losing, indicating that their acquisition costs per client were higher than the annual fee they were charging.
That’s not sustainable.
And Nutmeg aren’t even particularly cheap (0.75% up to £100k for a managed portfolio, plus fund costs). To try and rectify the situation, they now offer telephone advice, for £350 (each time a client seeks detailed, written advice, or wants a review of previous advice). They have stated that their offering is aimed at those who meet the following criteria:
- Not in a position where debt needs to be reduced
- A “reasonable” lump sum of money is set aside for emergencies
- Hold enough money to meet immediate financial needs
- Have appropriate insurance
- Have spare income or capital to invest when all other factors are considered
In other words, have already covered all the bases which form the bedrock of creating a financial plan. Hmm.
Other robo-advisers have also introduced telephone-based or face to face advice on a fixed fee ‘as needed’ basis to try and turn their fortunes around. They are going to need deep pockets, and it remains to be seen whether they will ever turn a profit.
As these companies have found, to their cost, what most people want is to deal with a human being, not an algorithm, who understands them. Even technologically savvy millennials value face to face advice.
The problem with the robo-adviser model of providing advice is that it lacks the personal touch. If you use Nutmeg, for example, for advice on a personal pension, and a year later want advice on saving for your children’s education what are the chances that both issues would be dealt with by the same adviser? An adviser who really knows you and your circumstances? And what if the need for advice involves life assurance? Or your mortgage? Or making a will? Nutmeg can’t help with any of that, but those issues can often be an integral part of someone’s financial planning. The only outcome I can see here is that advice becomes fractured, with no one person seeing the whole picture. How does that work effectively for you?
The investing and advice landscape has changed, and many advisers have needed to up their game to demonstrate their value. But I think we’ve reached an interesting crossroads. I don’t see a bright future for robo-advisers in their present form. In my opinion, the future looks something like this:
There will always be a cohort of people prepared to educate themselves about financial planning and investing (and it’s not as if there isn’t an abundance of free information available online to help them), and who will have the discipline to go it alone.
The majority will have worked out that low cost index funds will be both cost-effective and will most likely produce superior returns to any other investment strategy, although for a small proportion the fun of picking stocks and funds will have its attractions. For this group, all they need is a low cost platform to hold their assets.
If they favour the index route, then a platform such as Vanguard’s (annual fee 0.15% with a maximum of £375 per annum and total fund costs of between 0.06%-0.08%) will fit the bill perfectly. If they want to pick stocks and funds, there are already several options which are cheaper than the robo-advisers.
- Financial coaching
This cohort doesn’t want to go it alone completely, but their circumstances are not complex. This group will use a mix of self-education and paid help. The help they will pay for will not be from a financial adviser. It will be provided by a financial coach who will assist them in determining their money values and their goals for a fixed hourly rate.
Once they have the strategic basis of their financial planning determined they will self-implement, again using a low cost platform. They will use one of the many money apps available to track spending, budgeting and the progress towards their goals. They may check in with their financial coach from time to time if a life event means a rethink to their strategy is needed.
- Advice and hand holding
This cohort also doesn’t want to go it alone, and their situation is not necessarily complex. But this group lacks the time or inclination to deal with their finances themselves.
This group will view their financial planning in the same way that they view their gym membership or Netflix subscription and will use a financial adviser to produce and implement their initial plan (for a fixed fee), and will pay a monthly retainer to be able to access their adviser whenever they need help. The retainer will also cover the costs of periodic reviews to update the financial plan and make sure everything is on track, making course corrections as and when needed. This is ‘financial planning lite’ but will still provide a very personalised service.
- Full service
This cohort has significant wealth and fairly complex circumstances. They do not want to go it alone and value a highly personalised, comprehensive financial planning and wealth management service.
Their needs encompass inter-generational planning, business planning, philanthropy, decumulation strategies involving assets in multiple locations, tax planning etc. It will most likely involve a team of advisers – their lawyer, accountant and financial planner working in tandem.
None of the above, it seems to me, indicate a role for robo-advisers.
The most interesting thing to me is that when the first robo-advisers launched in the UK, very few firms could provide the offering detailed in option three above, and be profitable. But the irony is that the technology available to robo-advisers is increasingly also available to human advisers.
With more and more of the planning and investment process capable of being automated, advisers now have the time to spend on the bit which adds the most value to their clients – interacting with them at a deep and very personal level. Firms will increasingly need fewer backroom staff as technology will be able to do what they do at a fraction of the cost. That will lead to reduced overhead costs and will, therefore, make this service offering both affordable for clients and profitable for planners.
To my mind, it is options 2 & 3 above, which will be the biggest areas of growth in the future. Over time as these offerings develop further, I can see a proportion of people migrating from option 1 to option 2, or 1 to 3, if their situation changes and/or they cease to have the time or inclination to DIY. And I can see a migration from option 3 to 4 as people’s wealth grows and their needs become a bit more complex.
The above looks to me like a personal finance landscape which will meet the majority of people’s needs at a reasonable cost. It won’t, of course, meet the needs of those whose level of wealth is so modest that they cannot afford to pay for any professional advice. But that’s an issue society has to find an answer to, not the financial planning profession.