What robo-advisers need to do to succeed

After hearing clients in the large banks and insurers say things like the internet would be ‘a flash in the pan’ I felt they were wrong and we set about building the country’s first regulated, automated advice service (in today’s language ‘robo-advice’).

Sort was successful in a few ways; at its peak in 2000 we were advising over 1,000 people a day - this meant we took them from a fact-find through to ‘reasons why’ and making investment recommendations mostly around Isas.

We generated a lot of interest and we successfully sold the business to mPower, which back then was the largest provider of online advice to US 401k corporate pension schemes.

If I had to distil what I learnt from my time with Sort and then mPower it would be as follows:

1) Technology alone is not enough.

While your modelling and user experience can be compelling, most people (who have any money to invest and this is important), outside of a corporate pension scheme want to have someone to trust to discuss and act on any advice.

Sort’s customers and I imagine those using services such as Nutmeg (albeit non-advised), Wealth Wizards and in the US services such as Personal Capital and Wealthfront, are self-directed.

At Sort we found that even though it was advice being provided, customers would either a) use the service to check a list from Hargreaves Lansdown or b) take the report into their adviser to discuss.

2) Institutional quality asset and risk modelling delivers more consistent and almost certainly better risk adjusted outcomes for customers than individual fund picking advisers.

I remember going to mPower’s funky offices in San Francisco (converted warehouse, pool tables like all good dot coms) and being sat in front of a very slow, Monte Carlo simulation by the then CEO while being told ‘this changes everything’.

Given the simulation took about three minutes to build over a 56k dial up modem, I seriously doubted it at the time.

All you need to do is to provide a service with a relatively narrow scope and you will capture 80 per cent of people’s needs

But actually he was right, the internet is an incredibly powerful delivery channel for analysis which requires significant amounts of computing power where you have a strong central investment and financial planning team, building the model and setting assumptions.

3) The economics of direct to customer distribution are horrible. It is not that it can’t be done but if you look at the low pricing on retail investment products, the typically smaller investment sizes involved and the money you have to spend to become a trusted brand, it is no wonder that there are few standalone direct to consumer businesses who can make it work.

Private equity often makes a bet that the robo-advice management team will be able to get sufficient profitable traction with retail investors before their own investors’ patience runs out, or at least sufficient proof points that even more capital can be raised.

It is a real challenge and not one necessarily where the customer wins.

4) The 80:20 rule is actually the 20:80 rule.

More recent robo businesses are built on the idea that at their heart, most customers’ needs are very similar. All you need to do is to provide a service with a relatively narrow scope and you will capture 80 per cent of people’s needs.

This simply is not the case. Most people (particularly with money) have slightly or very different circumstances.

Just think about the plethora of financial arrangements you might have in place if you are in your 50s and been saving and investing for 30 years one way or another,  let alone your personal circumstances; young, old, single, married, divorced, thinking about getting divorced, thinking about getting divorced with children…) you get the picture.

Everyone is different.

While it is true that the answers for 80 per cent of the people may be very similar the reality is that when a customer (other than the self-directed) starts thinking about their finances they are a million miles away from understanding let alone acknowledging this.

The role of the financial planner as a trusted consultant and adviser is the reason why 90 per cent of investments in this country are made through financial advisers and planners.

Ben Goss is chief executive of Distribution Technology