Learning to love the robo-investor and robo-adviser

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-advisers, in the first instance, provide discretionary advice, using algorithms to steer people towards a particular investment portfolio based on their responses to a series of profiling questions. In essence, it is advice on what level of risk an investor should take, drawn together from information about their savings habits, debt, lifestyle, and goals.

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.

In short, big changes are required to help ordinary people grow their money and shore up their financial future. And with a quarter of Britons having less than £3,000 saved (according to data from Wealthify) the solution must also be low-cost and affordable for the mass market, which is not willing to pay £150 per hour for financial advice. Robo-investing, with its far cheaper operating models, holds great promise as a way to achieve this overdue democratisation of saving and investment. 

It also changes how people access investment services. Anyone, anywhere (with an internet connection) can take advantage – not just those who have the time or inclination to find and visit a good financial advisor or investment manager. It is instant and agile services like this that appeal most to the younger generation and leave banks and traditional providers scratching their heads as they try to work out how to compete.

Robo works for those accustomed to polished online services, especially those who are not particularly loyal to the big, and in some cases damaged, financial brands.

So robo also ticks the accessibility box, but when it comes to managing investments, modern machines are in many respects a lot better than humans.

Being successful in today’s complex financial markets is a matter of processing and analysing tremendous amounts of data as quickly as possible – a task for which computers will always have the upper hand as their precision and computational power far exceeds that of any human.

Successful investing also requires discipline and consistency; humans are prone to bias, panic and emotional decision-making, all of which can spell disaster for an investment portfolio. It is precisely why many of today’s top institutional investors are becoming increasingly reliant on algorithms and automation, and across financial services Fintech is driving huge improvements in customer experience, security, risk management and operational efficiency. Today it is power to the programmer, technology is centre stage.  

But in the complex world of financial services, while technology often has a starring role, achieving the right balance of human and machine is crucial. Humans still have an important part to play – it will just be different to that of the traditional investment manager.

Robots are great at the ‘heavy lifting’, but we will always need investing professionals to design, build, and tweak the algorithms, and ultimately to keep a watchful, reassuringly human eye on the money. And, crucially, these investment professionals should be expert in selecting and managing an investment portfolio suitable for the mass market.

While ETFs seem to be the mainstay of the robo offering – largely because they offer relatively cheap and easy access to global financial markets and are less volatile than actively managed funds – fees are still too high to enable someone with a few hundred pounds to invest to have a truly diversified portfolio. So an investment expert who understands that use of, for example, fractional funds, can offer true diversification, is key. 

If Sci-Fi has taught us anything, it is that a robot is only as good as its programming. Provided those in the financial services industry remember this, investors should welcome their new financial robo assistants with open arms.

Dr Richard Theo is chief executive of Wealthify

Key points

Robo-investing and robo-advice are on the verge of a major breakthrough in the UK.

The cost to traditional wealth managers of providing face-to-face advice to clients does not cover those with small amounts to invest.

Robots are great at the ‘heavy lifting’, but we will always need investing professionals to design, build, and tweak the algorithms.