Robo-adviceMar 19 2018

Questions raised as robo advisers hire humans

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Questions raised as robo advisers hire humans

Robo-advice firms offering automated financial advice have begun incorporating human advisers into their service, raising questions about how this will impact their business models.

Schroders-backed Nutmeg is currently looking at introducing human advisers into its service, while rival Scalable Capital, in which Blackrock has a large minority stake, has recently done just that.

But this shift away from automation has raised questions about how a human-supported or hybrid service can be reverse engineered into a low-cost online system that is the central feature of robo-advisers.

Shane Williams, the co-head of UBS SmartWealth, said many robos had skipped advice and built what was effectively an execution-only product.

But he said now such firms are beginning to realise clients also want advice.

"This means either rebuilding their products from the ground up or taking the easy – but expensive – route of offering traditional advice sessions.

"Many are choosing the latter.

"This presents a problem around long-term viability of robo business models. If costs rise and businesses fail, the retrospective addition of financial advice might end up costing everyone," he said.

Michelle Pearce, chief investment office at Wealthify - which does not offer advice, agreed: "There’s a lot of confusion with the term ‘advice’. Many people take it to mean customers want the full fat advice, but it doesn’t have to be that at all.

"A skimmed version can work very effectively and, we believe, be integrated into a digital proposition relatively well, in a scalable manner.

"But the full fat advice route is a different ball game. We’ve not seen anyone in the UK effectively integrate holistic financial advice into their robo in a solely digital way. This means human advisers need to be relied on which is expensive and defies the scalable and cost-effective principle that robos live by."

In 2016 the Financial Conduct Authority launched its advice unit which aims to help firms develop automated advice models.

The first cohort included 10 firms - of which five were banks - with Evestor and Moneyfarm the only big name robo-advisers to have taken part in the programme.

One of the robo-advisers to have integrated advice into its service - Scalable Capital - has done so with human advisers. The other - Nutmeg - is still "exploring" its model.

Simon Miller, co-founder of Scalable Capital, said: "The process remains well aligned to our scalability; we can automate large parts of the advice process and the advice we offered is transactional in that we do not then offer ongoing advice.

"If clients go on to become clients of our investment service then they become part of our discretionary investment management service which is entirely automated and ensures that their portfolio is managed in line with their risk tolerance."

Meanwhile Shaun Port, chief investment officer of Nutmeg, said: "We are currently exploring a model where we could combine the best elements of digital wealth management and more traditional financial advice.

 

Robo-adviser fees for a £100,000 investment 
Nutmeg1.04%
Scalable Capital0.75% fee plus 0.19% for the ETFs
Moneyfarm0.92%
Evestor0.52%
UBS SmartWealth1.69% for active and 1.19% for passive

"We are in the early stages of development and are currently looking to recruit a financial adviser to support our head of financial advice, Lisa Caplan, in this work. We expect to introduce a new service to existing customers this year and would potentially seek to grow the team to support customer demand."

Evestor is another robo-adviser which uses human advisers, as well as Canadian firm Wealthsimple, which launched in the UK last year.

Anthony Morrow, the chief executive of Evestor, said: "Human involvement was always part of the Evestor business model as we recognised that, despite advances in technology and also our customers’ willingness to engage digitally, money remains a very emotive subject and people like to have the comfort and assurance that a human voice can provide.

"There are obviously costs associated with providing human services, but these have always been built into our business model. The additional costs will mean that the journey to profitability could be longer but conversely the added benefits of having humans available may actually mean that we get there quicker than if we didn’t offer it at all."

Toby Triebel, European chief executive of Wealthsimple, said: "Human advice has been part of our core offering since day one as we strongly believe in building a human-focused brand in financial services, which we don't believe a lot of players in our industry are currently doing.

"In terms of scalability, we see clients looking to speak with an investment adviser when they first open an account, when they are making a big financial decision or around tax-year deadlines.

"We've grown to 65,000 clients globally and our investment adviser team has grown but not tripled in response as we also use technology to build more investment advice into our product to make it more helpful for people. What we're providing is a blend of human and technology."

Simon Bussy, director at Altus Consulting, said many robo-advisers were able to make the investment into including human advisers because they were backed by large financial services businesses.

Nutmeg, for example, saw its losses increase to £9.3m for 2016 but has received considerable investment from Schroders, while Moneyfarm, which is backed by Allianz, made a loss of £6.3m and Scalable Capital, which recently sold a stake to BlackRock, made a loss of £956,000.

Mr Bussy said: "While internal costs may rise by offering advice , this should be offset by a more attractive and expansive customer proposition and increased revenues.

"It’s unlikely the ‘robos’ will increase their fees to compensate for this increase in costs – it would make them an outlier in an already hugely competitive marketplace where attracting new ‘direct’ customers is already a significant challenge.

"Alongside a first class proposition, the real key to achieve scale and profit is to have a trusted brand, existing customers, and deep marketing pockets. This is the reason why we’re seeing a number of the propositions in the UK pivot their business model to introduce a B2B(2C) strategy alongside their D2C service, and also seek significant investment, just as we saw in the United States some years ago.

"And when backed by a larger player, it also means there is less pressure to increase fees, albeit the investor will want to see a return on their money within agreed timescales."

damian.fantato@ft.com