One of the hottest topics in financial circles particularly in the US, has been the growth of so-called ‘robo-advisers’ and the implications for their human counterparts.
Behind the rather sensationalist label, robo-advisers are simply low cost automated portfolio construction and management services. Investors simply log in, answer a survey and get a portfolio under way. There’s no advice ‘per-se’ (at least not in the accepted sense), rather some rule-based guidance around asset allocation.
American businesses such as Wealthfront and Betterment, are some of the biggest players in this space. Last year, Vanguard – the largest mutual fund provider in the world and the third-largest ETF provider in the US – announced that it was joining the robo-advisory industry.
As you can imagine, the suggestion that human advisors will somehow compete with automated providers is guaranteed to get a response, much of it emotional. But the mere suggestion is a little misguided – not because the robo-adviser value proposition doesn’t stack up but rather because its intended target remains quite appealing. Its proposition and target are both quite narrow and focussed.
That target being the tech savvy investor with relatively small amounts to invest. These are investors who don’t have complicated financial situations and are comfortable taking a DIY approach. The small investment size means these clients aren’t financially viable for many practices.
At the moment the number of people using robo-advisers in the US has been relatively small, and collectively these services manage less than half a percent of total ‘funds under advice’.
How do they work?
Once signing up for the service, clients complete an online questionnaire designed to gauge risk appetite, time frame, and general investment objectives. The answers to these questions then determine the appropriate asset allocation across a range of low cost exchange traded funds and providers (not dissimilar to the ‘model portfolio’ approach).
At Betterment, the annual cost is 0.35% of assets for accounts below $10,000, sliding down to 0.15% for accounts topping $100,000. Wealthfront charges nothing for sub-$10,000 accounts and 0.25% for amounts above. In each case, clients also pay management fees on the underlying ETFs, which typically are 0.15% or so per year.
At this stage, these services do not offer life insurance related services.
What do US advisers think?
The short answer is that while they are watching developments in this space, advisers don’t see robo-advisers as a significant threat at this point. As one adviser put it “People can answer questionnaires and they can have portfolios built for them, but they can’t get ongoing conversations about their future and what concerns them.”
It’s worth noting that most of the growth of the robo-advisers has been post GFC, and so investors are yet to experience a significant market downturn. The next (inevitable) correction will prove to be an acid test – especially given the instincts of many is to sell out when markets head south. Troubled times are exactly when handholding may be needed most.
Another view of these robo-advisors is that they are expanding the market for financial advice. The planning tools and software algorithms they use to customize services for people who otherwise wouldn’t have access to them are helping investors make better decisions with their money. And these investors may eventually ‘graduate’ to needing the human touch as their assets grow.
But whilst the element of human interaction remains a big competitive advantage for traditional advisers, it would be a mistake to simply dismiss the competitive relevance of robo-advisers. Several consequences of this trend seem likely.
One is disruption to the whole economic framework of advice. In the same way that discount brokers have impacted full service firms and ETF funds have pressured fund manager margins, automated portfolio management services could eventually put price pressures on this aspect of advice.
The second is that – regardless of whether there is a human or a computer at the other end – people are becoming more tech savvy and will increasingly look to access aspects of advice through technology.
The third is that advisers will increasingly need to demonstrate the value they add. Whilst the list of ways a human adviser is superior to an automated solution is a long one, many consumers won’t fully grasp that unless it is spelled out to them. Not because they aren’t intelligent or engaged, but because they ‘don’t know what they don’t know’.
And whilst advisers understand the multitude of ways they can add value, some struggle to articulate that value effectively. Those that master this are the ones who can break away from a game that’s played on price – one that’s hard to win – and change the conversation altogether.
The final consequence could be that some advisers will see this as an opportunity to make their advice more accessible and affordable to a wider target audience. In other words, they may look to incorporate some kind of technology-based advice offering into their overall service proposition. Not so much a case ‘if you can’t beat them join them’, but more recognition that the way individuals are choosing to interact with companies and with each other continues to undergo dramatic and irreversible change.
