SCM Direct has launched a scathing attack on the emerging ‘robo-advice’ industry, arguing most firms are destined to fail, leaving regulators and ombudsmen to clear up the mess.
A report suggested such firms are wired to lose money, with most likely to go bust before acquiring the sizeable assets under management required to ensure their sustainability.
SCM’s research looked at 10 UK robo-advisers, finding average fees excluding VAT for a £25,000 portfolio, where disclosed, were 0.59 per cent a year (fees ranged from 0.3 per cent to 0.94 per cent annually).
SCM calculated revenues excluding VAT for a £25,000 account based on an average 0.59 per cent excluding VAT were just £147.50 a year.
Many of these companies appear to be storing up huge liabilities if down the road either their algorithm fails or markets collapse SCM Direct reportIn terms of money spent on initial advertising and client acquisition, many robos appear to be spending large sums on Google AdWords, which SCM stated its own experience suggested costs of about £3.15 per click.
SCM also claimed the finance sector has an average conversion rate via Google Display Network of just 1.75 per cent.
Therefore, customer acquisition costs were calculated at £3.15/0.0175 or £180 per account for this one advertising channel alone.
From the latest report and accounts of four UK custody and administration platforms, which concentrate on UK financial advisers, SCM calculated that average operational cost as a proportion of assets were about 0.29 per cent annually.
Including the net interest income payable/receivable within the overall costs, but excluding any other operating income, SCM estimated 0.0029 times £25,000, or £72.50 per account.
SCM’s analysis also stated the robo-adviser business model appears to be employing more investment management, IT, sales, customer service and compliance staff than expected.
“From our calculations, it would take more than 10 years for these robo-advice companies to break-even, and nearly 11 years to make a profit,” the report concluded.
“In a best case scenario, even if a robo-adviser managed to achieve a 10 per cent a year investment return, whilst keeping growth costs to just 5 per cent a year, it would still take five years to break-even.”
It also pointed out that by often targeting younger investors with smaller pots, UK robo-advisers will be hampered by managing uneconomic accounts.
“The escalation in robo-advisers all targeting millennials is surprising as this target audience represents just 5 per cent of the overall investment market,” the paper added.
As for regulatory issues, evidence from the sample of 10 UK rob-adviser firms revealed misleading performance calculations, “questionable” statements regarding fees and a reliance on risk questionnaires, missing pages of key legal documents.
The research showed 80 per cent of these firms’ websites use risk questionnaires, but 25 per cent of these did not possess the regulatory permission to give advice to retail clients.
This would be a material regulatory breach were the services of these two firms to be deemed by the Financial Conduct Authority or the Financial Ombudsman Service to be advice, read the report.
“As a result of the FCA desire to fill the advice gap they appear to be plugging one hole whilst creating an even larger regulatory one,” it stated. “Many of these companies appear to be storing up huge liabilities if down the road either their algorithm fails or markets collapse.”
At the start of June, the FCA launched its automated advice unit, following on from Project Innovate and proposals made by the Financial Advice Market Review.
Bruce Moss, strategy director at eValue - which itself entered the robo market in May - responded that if robo-advice is thoroughly tested before launch, it should be much more consistent and reliable than advice delivered by human advisers where the quality can be variable.
He said: “Far fewer regulatory problems should result from a carefully designed, tested and monitored process than traditional human-delivered advice.
“However many robo ‘advice’ offerings are in fact offering guidance, and in view of the ‘grey area’ between guidance and advice, we believe it is actually safer to give advice to consumers rather than risk overstepping the guidance to advice line and being in hot water with the FCA for inadvertently giving unsuitable advice which doesn’t take account of the consumer’s circumstances.”
peter.walker@ft.com
