Before we do, let’s first deal with that horrible term, ‘robo-advice’. The thing about robo-advice is that there aren’t any robots, and most of the time they are not giving advice (at least not as we would recognise it). Having visited a few of them, I can’t stress enough how disappointed this Star Wars-raised kid is at the dearth of R2D2s conducting capacity for loss questioning.
Something else about robos is that most things described as robos are just highly structured low-cost advice propositions. Schwab and, notably, Vanguard offer these – and they are galloping. Real robos, in contrast, remain a minority sport. Betterment, one of the most established robos, has, after a good few years battering away at it, $2.6bn AUA (or it did when we were in the office; it has a counter on the wall).
Most of the others are in the hundreds of millions rather than billions, such as FutureAdvisor (which just got gulped by BlackRock for $150m or so), which has $235m.
And that is where the interesting part lies in my view. What if the future for robos (sorry) is not in the replacement of advisers, but in bringing the technological and the personal together?
For this to work, there needs to be a genuine price differential between the low-cost/online proposition and having an IFA (Registered Investment Advisor or RIA in US-speak) coming and sitting in your front room and eating your biscuits.
They have managed this in the US – Betterment comes in at between 0.35 per cent and 0.15 per cent for its core service and its ETF portfolios run at around 0.12 per cent. So for between 0.27 per cent and 0.47 per cent you get automated advice, goal-based portfolios and a very nice portal to play with.
Flesh and blood
Ah, but you’re too clever to be hoodwinked by that. Betterment doesn’t have people giving you advice – so it’s easy for it to be el cheapo. What about flesh and blood advisers?
Good point. Let’s have a look at Vanguard. Vanguard’s Personal Advisor Service (Vpas) is a hybrid service. You self-serve at the start, and then toe the ball over the line with a phone-based adviser (or ‘advisor’ as the Yanks say, mistakenly). That adviser won’t come out to see you unless you have several million dollars.
Once you are up and running, how much you choose to use your adviser is up to you. If you’re wealthier (probably $1m plus), you get a named contact; if not then you speak to one of a team. But when you start a piece of work (like, say, a pension transfer), the individual you work with at the start of the job will stay with you all the way through.
Career move
Vanguard’s advisers are, in the main, trained up from within their customer service function. Running, as they do, $3tn of assets, they take a call or two, and this is seen as a great career progression. I don’t know what a Vanguard adviser earns, but it is less than you – and that’s the key.
You might think that this would really only appeal to mid-market clients – but Vpas has its smattering of what they call ‘pentamillionaires’ (folks with $5m or more), and lots and lots of clients who would be smack in the middle of most IFAs’ target client banks.
And it works. Vpas has $21bn on it. Vanguard has been at this for about five months officially, and has taken $4bn in new money during that time. In the two-year pilot preceding that it took $7bn of new money and rewrote an additional $10bn.
Why is this? For sure Vanguard is a trusted brand. But price matters. Dynamics in the US advice market are not that different to here – an RIA will charge at or around
1 per cent; you then pay custody and investment charges. So you’ll end up paying between 1.5 per cent and 2.5 per cent – not that different to most advisers here.
Vanguard’s offering gives you proper – if algorithmic – human advice with a big brand, all the tech support you might need, tax harvesting, goals-based planning, risk discussions and more. It takes fiduciary responsibility just the same as an RIA does. And it does all this for 0.3 per cent a year. Including investment. No product charges, trading charges, inactivity fees, extra you-called-us-up-too-many-times charges. 0.3 per cent.
What do you value?
This forces clients to ask what it is they value. If you can cut the total cost of investing by 75 per cent, how much do you care about the nice man who comes to see you? How much do you care about those active funds and how they will outperform?
Here in the UK, low-cost advice or investment services – such as Money on Toast or Nutmeg – are charging well in excess of 1 per cent all in. The cost differential is not there yet.
So OK, a big brand has done a big thing, 3,500 miles away. Who cares? Advisers run niche businesses, both here and there. What has this to do with the price of bread, or fish, or even bread and fish?
I’ll explain. If we were to survey 1,000 high net worth clients, in the style of the famous Cerulli study, I wonder how many would care how you go about your business. I am confident that wealthy clients understand business and efficiency as well as anyone, and would expect
you to be working in as efficient a way as possible. I think many would be surprised at how much time goes on back-room data collection and report production.
It’s here, I think, that robos and algorithms could start to have an impact.
No, no-one expects your wealthy clients to self-serve. But I would expect, over time, to see the bottom end of some IFAs’ books eaten by firms who have created streamlined business models and so are able to deliver genuine financial planning at a significantly lower cost than the incumbents.
Missing the point
Commenters who suggest that robos won’t take off in the UK because people like to talk to a person are missing the point. You can mix the two. And if you can systemise the process to a point where an adviser can be paid, say, £40k rather than two or three times that, you can start to bring the cost of advice and investment down radically.
That could close the advice gap, for sure – but it may also prove tempting for many affluent clients who will start to see a genuine alternative to total costs of ownership of 2 per cent or so.
This is a great time for advice firms to look at what they could do within, say, a total cost of ownership (investment, advice, trading, platform, wrappers) of 0.75 per cent. Someone will get this right.
It might as well be you, before a Vanguard, a Schwab or a BlackRock gets there first.
Mark Polson is principal of platform and specialist consultancy the lang cat
