The robots are here. But before you run for the hills, we are talking R2D2 rather than Terminators: benevolent machines, doing our heavy lifting, but better, faster and more reliable. Across almost all sectors, automation and digitisation are transforming our daily lives.
The world of investing is no exception. Robo-investing and robo-advice are on the verge of a major breakthrough in the UK.
Consulting firm A. T. Kearney estimates the rapidly expanding sector is set to grow 68 per cent annually, and could be worth $2.2trn (£1.73trn) globally by 2020. About half of this is expected to come from assets already invested with traditional managers, which is why big brands are looking to get in on the act – InvestTec Wealth, Brewin Dolphin, Hargreaves Lansdown and Barclays are all believed to be launching robo services in the UK this year.
They are unlikely to be the only ones owing to the tremendous latent potential in the market. If you consider there is currently £700bn sitting in cash savings in the UK, even if the robo-investment firms convert only 1 per cent of that, they would be managing £7bn. In the US, where the market is much more mature, robo-investors are already worth close to $60bn.
‘Robo’ here has been adopted as a loose, catch-all term for removing humans from various parts of the investment process and replacing them with automation, algorithms and slick digital platforms. It covers a spectrum of different models, from robo-advice through to robo-investing.
Robo-investing, meanwhile, usually refers to cases where algorithms select and potentially trade a portfolio on someone’s behalf. Robo-investors will make automated investment decisions based on the level of risk an investor chooses.
There is every reason to welcome the robo concept, not as a fad, but as a viable, mainstream investing channel for everyone.
Why? Because most ordinary people are priced out of traditional wealth management services – a typical IFA, for instance, will not sit down with a client with less than £20k to invest.
The fact is, the cost to traditional wealth managers of providing face-to-face advice to clients does not cover those with small amounts to invest. In a 2016 survey, conducted on behalf of the Association of Professional Financial Advisers, 69 per cent of advisers said they had turned away potential clients in the past 12 months. The most common reason being that the services offered would not have been economically sensible for the IFA given the circumstances of the client.
Meanwhile, the average saver’s cash is rotting away in high street accounts earning record low interest rates averaging less than 0.25 per cent per year. Research from MoneyFacts shows that following the Bank of England’s decision to cut the base rate in August, there have been a total of 354 cuts to interest rates of savings products in the UK. And the Bank may slash rates once again before the end of the year.