The term robo-adviser has become a catch-all for any online business involved in investment management. Digital wealth managers are often swept into this broad classification, suggesting that they are working in competition with financial advisers; but this does them a disservice.
In reality, both have a role to play in the management of a client’s finances and their services often complement each other rather than compete.
Financial advisers can add huge value to the management of an individual’s money. They conduct a comprehensive analysis of a client’s current financial situation, their aspirations and then create a bespoke financial plan.
Particularly for those with larger pots of money or more complex needs – such as around tax, inheritance or retirement planning – professional advice can make a big difference to a client’s financial future.
For many advisers, financial planning is their key strength. Many do not have the skills or resources in-house to provide the investment management required to implement the plan, which is why they often outsource the management of their clients’ investments. Those customers with big enough portfolios are often outsourced to a discretionary fund manager (DFM), while those with smaller investment pots tend to be outsourced to model portfolios.
DFMs offer personalised investment management, but in the past this has only been available to the very wealthy and comes at a high cost. Model portfolios are an off-the-shelf product that channels many clients into the same positions based on a limited range of risk profiles, and still may not be an option for clients with fewer investable assets as they usually also come with a required minimum.
Digital wealth managers now offer advisers a viable alternative. In the past five years, digital managers have used technology to lower costs, improve transparency and create a better user experience, in comparison with their more traditional counterparts. Some of these digital managers are using technology to improve the investment process so that the personalised portfolios previously available only to the super wealthy and institutional investors are within reach of the mass market.
Cloud computing has enabled this new breed of wealth managers to analyse enormous quantities of data, which means that these managers can help advisers offer personalised, globally diversified investment portfolios to a broader base of clients.
These digital wealth managers provide a full fiduciary service for far lower investment minimums than has previously been available, creating low-cost, highly liquid ETF portfolios based on the client’s personal circumstances and risk preferences. The most technologically advanced use vast data analysis to monitor and adjust each individual client portfolio, with the aim of keeping risk stable over time, independent of changing market environments.
Understanding the level of risk in a product is an important aspect of advisers’ role. The FCA has highlighted the issue of poorly worded risk descriptions: too many portfolios are labelled in ways in which the meaning can differ from individual to individual – for example, ‘moderate risk’.