“The best way to predict the future is to create it” is the famous quote from management philosopher Peter Drucker. It would appear financial advisers and technology entrepreneurs are taking Drucker’s advice literally and creating a confusing plethora of do-it-yourself, cloud-based investment sites labelled robo-advisers. These ingenious offerings will assess the client’s attitude to risk, consider their investment goals and using adroit algorithms entwined in model portfolio theory (MPT) select a suitable investment portfolio.
Harry Markowitz, the architect of MPT won a Nobel Prize for his work on the efficient frontier. Recently the assumptions of MPT have been challenged with the growth in research in behavioural economics. This trivial matter (along with no money for marketing) is not putting off small adviser firms who, with imbecile enthusiasm, launch another robo-advice web-site.
Larger entities are not concerned with any misaligned algorithm difficulties based on arguably flawed theories either. Global companies like Wealthfront, Nutmeg, Betterment and FutureAdvisor have gained millions of dollars in seed capital to launch a range of robo-advice offerings.
As of December 2014 robo-advisers managed £19bn of client money. Industry commentators expect the market to grow at around 70 per cent per annum. The figures in asset terms are small; Hargreaves Lansdown has over four times the assets of the whole robo-advice market at £84bn. Relatively small players in the platform market, for instance Nucleus Financial, holds over £12bn – in contrast, practically three quarters of the entire robo-advice market.
Perhaps robo-advice is technology with no market, £19bn sounds exciting, even if it doubled up over the next two years, the market would be still be smaller than the leading financial advice firm St. James’ Place with £80bn under management.
The dynamic flaw in robo-advice is creating very clever solutions for markets that may not exist – the expanse of individuals who want to use a self-investment service is trivial. Arguably. robo-advice has captured some tech-savvy early adopters and gained slender traction. They’re now in the tricky stage of entering the mass market and possibly the demand is just not there.
Regardless, the market appears excited about the potential of automated advice and with big players like BlackRock purchasing FutureAdvisor, it possibly opens the question: if fund-mangers are buying distribution, then the model must be genuine? On further scrutiny, FutureAdvisor has £230m under management, about the same as small firm of six advisers.
With all this noise, it’s ironic that the leading robo-advice firm, Betterment, is talking down the new market. The New York-based entrepreneur founder and chief executive Jon Stein, disputes the assumption that “robo advisers” such as Betterment could put tens of thousands of US investment advisers out of their jobs. Stein cites the controversial online taxi service Uber, even with outstanding technology and marketing, it is still very unlikely to put taxi firms out of business. Everyone overacts to disruptive technology.
So, Stein is a reluctant disrupter, he contradicts the idea he’s providing anything new, which is perhaps accurate. In the UK, robo-advice makes good headlines, contrasted with insignificant consumer impact. Realistically it’s a distraction from the current lethargy in the sector.
The UK regulator post the distribution review has been quiet, leaving advisers alone while focusing its resources on fining banks. To placate criticism of the governments meddling with pension legislation, prime minister Cameron appointed Ros Altmann, a politically inexperienced consumerist to the post of pension minister, the purpose feasibly to bring some calm to pension industry.
Is financial advice about to be interrupted, disrupted and discombobulated? Is the unproven advice gap about to be closed by a new generation of Robby the Robots? For the answer, perhaps we should turn to Mr. Stein the unenthusiastic disrupter. “It is not about our technology replacing human advisers, we see it [robo-advice] as complementary to their businesses.”
No, then. These aren’t the droids you’re looking for. Advisers can go about their business. Move along.
Richard Bishop is a lecturer in financial services at Coventry University College and a practising regulated financial adviser
