InvestmentsApr 29 2015

Dawn of the robo-adviser

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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.

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.

As with a human adviser, the robot adviser guides the customer through a series of questions designed to assess their financial and personal circumstances, and then creates a tailored report of recommendations.

There is also a white-labelled version of the system to enable other advisory firms to use the technology to offer online advice to their own client banks. Charlie Nicholls, partner at London-based CPN Investment Management, the parent company of Money on Toast, said there are many online advice services that are just as good as a human adviser – in some cases better.

He said: “This is particularly the case for simple products such as Isas and general investment accounts. When we look at the US market we see that “robo-advice” is already picking up significant market share, with some companies holding billions of assets under management, for example, WealthFront.

He added that the main advantages of Money on Toast’s online offering were its low cost and the compliance and audit trail capabilities – supposedly designed to make mis-selling more difficult.

“However, I do not think it will replace them entirely as there will be some more complex areas of advice, and indeed some types of clients who will still want to see a face-to-face adviser.”

Online investment management services have blown the door open for more people to have a chance to invest in funds, according to Mr Hungerford.

He added that the fee for the use of these systems is generally below one per cent and there is usually a low minimum portfolio value required to use a robo-adviser, whereas some brokers stipulate a six-figure minimum value.

Robo-advisers are also able to compete with IFAs when it comes to convenience – though a large number of advisers have utilised and embraced modern technology to offer the best service to their clients. However, robo-advisers go a step further. While claiming these system do not measure up to actual investment managers, Paul Coffin, chartered wealth manager at Capital Financial Markets, based in London, admitted that they are good for people who do not have the time to learn the finer points of investing.

But would people trust their hard-earned cash, especially that destined for a child’s trust fund, to an algorithm-based system?

Mr Coffin said some of these automated investment management services were based on academic research and have been discredited following the financial crash.

He added: “Would I entrust a great sum of my money to an online system? Probably not. The human touch is extremely important, and increasingly so. As people become more technological, there is a growing possibility of systems failing due to some bug or even hacking.”

There is, however, the old saying that goes, if you cannot beat them, join them. IFAs may seek to employ these platforms as a way of streamlining their services, especially following a host of legislative and policy changes announced in recent Budgets and Autumn Statements.

In December, Fidelity Institutional announced a collaboration with automated platform LearnVest.

The joint venture gives registered investment advisers access to an educational “financial wellness” microsite with LearnVest’s original content as well as preferred pricing to LearnVest’s subscription-based digital advice platform.

This deal comes on the heels of Fidelity Institutional Wealth Services’ partnership with Betterment Institutional, to launch an automated platform to serve existing advisers and attract new ones.

Alan Solomons, director at London-based Alpha Investments & Financial Planning, said: “The success of these systems is dependent on the complexities of these algorithms. and it will be able to pick up the nuances of what the client needs.

“You are already seeing advisers utilising technology in their services. You see people filling out surveys, questionnaires and even risk assessment on their tablets; so online investment management systems would just be another step in this trend.”

Myron Jobson is a features writer at Financial Adviser

Key points

Investors can opt to use an automated system which offers advice at a fraction of the cost of a flesh-and-blood adviser.

Online investment management services have allowed more people to have a chance to invest in funds.

IFAs may seek to employ these platforms as a way of streamlining their services.