Investments  

Dawn of the robo-adviser

The threat that artificial intelligence poses to humans is an idea often expressed by Hollywood screenwriters penning the next multi-million pound blockbuster.

To IFAs, this threat potentially manifests in the form of ‘robo-advisers’ – online investment management sites based on algorithms that originally served the traditional advisory community.

The name of the system has been coined by the media more for sensationalist purposes than its accuracy, given its function.

Article continues after advert

Instead of paying thousands of pounds to flesh and blood IFAs, investors could instead opt to use an automated system which offers advice at a fraction of the cost.

But is this form of advising really a viable and ample substitute for the traditional face-to-face advisory process?

The ascendance of automated technology has been cultivated in the US – resulting in the emergence of leading robo-advising firms such as Betterment, Wealthfront and Personal Capital.

Earlier this month Vanguard announced that its Personal Advisor Services, which combines aspects of web-based advice and investment-modelling algorithms with traditional human contact, is ready to be rolled out to clients this spring.

According to research by Switzerland-based financial research company, MyPrivateBanking Research, web-based wealth management providers that offer automated investment services will grow rapidly and pose a real threat to the business models of conventional wealth managers.

The 2014 research – its latest – estimated that global assets under management of robo-adviser services would have reached US$14bn (£9bn) by the end of 2014 and that the lion’s share of these assets, 83 per cent, would be managed by robo-advisers based in the US.

Within five years the global AuM of robo-advisers is forecast to grow to an estimated US$255bn (£171bn), according to the dossier. Meanwhile, the growth of online investment systems has not been as prevalent in the UK as on the other side of the Atlantic.

Nutmeg, formed in late 2012, is the UK’s first online discretionary investment management company which allows investors to create a professional and bespoke portfolio that gives them exposure in various markets.

Once an investor is signed up, the software allows them to key in how much money they are looking to invest, for how long and the amount of risk they are prepared to take.

However, the system relies on investment specialists, not machines, to determine where money is invested.

Nick Hungerford, chief executive of the London-based company, said: “For us, developing an easy-to-use system that is affordable and completely transparent which enables investors of all levels of wealth to make investments was key.”

He added: “A lot more people will move towards an online solution in the future. Sure, people will be suspicious of the system at first, like they were with online banking, shopping and even dating.”

Another key aspect of investment management is taking advice – there are websites for that too. Money on Toast, for example, offers a discretionary fund management service as well as advice on investments, mortgages, pensions and insurance using algorithms based on knowledge of all their financial advisers.