Jeremy Fawcett, head of direct and Miranda Seath, senior researcher, at Platforum argue that robo-advice winners will be disrupt-ish.
In 2016, robo-advice winners will be disrupt-ish not disruptive.
It seems almost impossible to read the financial adviser trade press without catching sight of another headline about the impact of robo advice on the UK financial advice sector. However, there is often little clarity on what a robo-adviser really is. This developing space is fairly nuanced. But we believe that successful robo-advice models are likely to have two hallmarks. The successful protagonists are likely to be disrupt-ish rather than disruptive and will use man and machine to deliver robo-advice.
The concept of man and machine working in partnership isn’t new. We see a parallel between robo-advice in 2016 and centaur chess, a new form of chess developed by Gary Kasparov in the ‘90’s.
Man v Machine
In 1992, Gary Kasparov was world chess champion and widely acknowledged as the greatest chess master that had ever lived. Kasparov’s genius tempted IBM, the software giant, to try to prove that they could build a computer that was so sophisticated that it could take on Kasparov and beat him at his own game. Unable to resist IBM’s provocation, Kasparov agreed to a chess match between man and machine. And he beat it.
Undeterred (but no doubt slightly humbled) IBM’s programmers went back to the drawing board, convinced that it was possible to take Kasparov on. A re-match was tabled. And this time IBM’s computer beat Kasparov.
Kasparov’s defeat germinated the seeds of an idea. Man and machine acting individually had both shown themselves to be beatable. But what if Kasparov harnessed his own intellect and the power of IBM’s machine? Kasparoff saw a combination of man and machine that was infinitely more powerful and created the concept of Centaur Chess.
It’s a great story and it nicely illustrates the robo-advice opportunity. We think that the robo-advice winners will harness both man and machine to achieve better outcomes for the end-investor.
Disrupt-ish v Disruptive
We also think that the winners will be disrupt-ish rather than disruptors. Whilst some may argue that financial services is crying out for a bit of disruption, we beg to differ. Instead, we should aspire to be disrupt-ish. To quote Malcolm Gladwell in his 2011 New Yorker article on the real genius of Steve Jobs ‘The tweaker inherits things as they are, and has to push and pull them toward some more nearly perfect solution. That is not a lesser task.’
So who is likely to do well and why? Clearly some of the direct platforms will use robo-advice to add another layer of service to the end-investor. The relationship is already in place and our research shows that there are 7.1 million investors out there using a combination of DIY investing and financial advice. Direct platforms may well be watching and waiting for the findings of the Financial Advice Market Review before they start throwing money at robo. But it is only a matter of time.
From across the pond, there is BlackRock’s Future Advisor (launching in Europe this year) and Charles Schwab. Schwab has had phenomenal success through its intelligent portfolios. It requires a $5,000 minimum investments and portfolios are composed of in-house ETFs and, usually, a significant cash component. Within 6 weeks of launching, Schwab had attracted $1.5bn in assets and 23,000 clients – numbers that UK robo-advice propositions would give their right arms for. Whilst $1.5bn in assets is a drop in the ocean for Schwab – it is the largest US broker with $2.5 trillion in AUA – it beat the fin tech start-ups Betterment and Wealthfront hands down.
In the UK, some financial advisers are successful harnessing the power of robo. Fiver a Day uses Parmenion’s Interact Solution. Its raison d’etre is to facilitate healthy investing. Instead of turning away clients that are not wealthy enough to pay financial advice charges, Fiver a Day brings charges down for clients without compromising on the functionality of the technology.
LV=’s Retirement Wizard is similarly trying to bring costs down for the end client through what it terms an ‘interactive regulated advice process.’ At the end of the advice process a client might take no action. If so, the client is charged £199 for the initial advice. But if he or she decides to take things further and take out an annuity, go into drawdown or another route based on Retirement Wizard’s initial assessment, the client is charged £499. LV= see this as an opportunity to return orphaned clients to advice.
Being disrupt-ish is not about turning our industry on its head. But it is about taking a new approach.
MyAviva is a great example of a disrupt-ish initiative. Its app aggregates customer policies within one portal. As an Aviva customer, I can take a look at the balance of my workplace pension and then click into my Aviva protection policy to check my premium. Discounts and deals are clearly marked and tools and calculators are available to help me to manage my finances holistically.
With banks poised to re-enter the advice market to plug a hole in the advice gap, it seems obvious that online banking and access to an investment account through the online banking portal (an interface customers are already comfortable with) is a logical step. Banks are also sitting on a mountain of transaction data – an advantage in helping to build a complete picture of customers’ financial affairs.
For advisers, there are different potential drivers for going robo: it could be about reducing costs both to the client and to the adviser. It could be about achieving better consistency of delivery. Automation is a significant advantage of robo-advice and at some level we would expect to see robo-advisers automating any of the following elements: the customer journey, financial planning or investment management.
If robo-advice is the right route for an adviser’s business, we don’t see anything to fear. Man and machine is a powerful partnership and love or loathe the term ‘robo-advice’; in essence robo-advice is man and machine working together. Whatever form this may take, we are optimistic that it can lead to better investor outcomes.