‘Robo-advice’ has been in almost constant discussion in the UK’s financial services industry over recent years, as some see the increasingly popular service as a way of narrowing the country’s advice gap while others warn it is a threat to the face-to-face financial adviser.
The service, which in its most typical form is an online wealth management service offering algorithm-based, automated portfolio management advice without the involvement of human financial planners, was pioneered in the US through names such as Wealthfront and Betterment.
When it comes to the UK, a number of robo-advisers have emerged since 2012 – as shown in the image below – with Nutmeg arguably being the best known although the likes of Money on Toast and Moneyfarm are offering stiff competition.
UK robo-advice offerings in operation from 2012
Source: Barclays
Analysts at Barclays, which covered the issue at its fifth annual UK savings conference earlier this month, said: “Robo-advice, technology enabling scalable advice at lower cost, is being encouraged to help solve the advice gap. Robo-advice is about disrupting the lack of consumer engagement in saving as much as disrupting fee structures.”
“The debate is raging as to what extent robos may displace human advisers, but even the disruptors at our conference suggested ‘Robo 2.0’ would likely be a hybrid model with a human element.”
“Robo-advice will be a tool to attract basic needs customers, and as a customer’s demands evolve to include more complex solutions a human element may be required, whether in the form that it exists today or through digital channels such as the phone and video chats.”
While the exact impact of robo-advice is far from decided, Barclays thinks there is a strong likelihood of the five outcomes below being seen in the years ahead.
Fee compression for advisory services, particularly at the lower end
Barclays says there is already evidence that the traditional asset and wealth management industry is starting to the respond to the potential threat created by the lower-cost robo-advice model.
“The low cost fee structure of robo-advice is likely, in our opinion, to put downwards pressure on traditional advisory business models over time, particularly at the lower end. Or, at the very least cause an improvement in service and performance to continue to justify high fee structures,” it analysts said:
“With normalised return expectations falling in recent years to 4-5 per cent per annum, a total advisory fee structure which can exceed 2 per cent appears too high a frictional cost for the long term.”
At its annual savings conference, Barclays polled attendees on where they expect robo-adviser fees to end up in five years; most think they will sit between 20 and 30 basis points.
Where are robo-advice fees likely to trend in 5yrs?
Source: Barclays audience response system
Technology advances to improve sophistication of offerings
Given that robo-advice is at heart a technology-based solution, Barclays expects technology to drive the development of the services and cause a rapid expansion in the features it can offer investors.
“We believe it is likely that very quickly the technology behind robo-advice offerings will advance, enabling more tailoring of service proposition,” it said.
“Cognitive intelligence is likely to extended to attempt to predict and respond to customer actions. For instance, anticipating client’s desire to redeem when markets correct and provide reassurance over staying invested.”
“In addition, technology should allow more bolt-on service propositions, such as advice on product wrappers, incorporating the needs of dependents such as school fees, estate planning, etc.”
Development of hybrid models
While there is every chance that a ‘pure’ robo-adviser model could prove successful, the bank’s analysts argue that the technology’s limitations in providing very tailored advice to clients means that more hybrid-type models will be made available in the UK.
This would mean clients are channelled into a low-cost, fully automated solution to service the bulk of their needs but they could be given the option of consulting with a human adviser when they have more complex requirements.
“When that customer requires a specific piece of advice around an event, such as retirement, at that point they could then pay separately for human-based advice services,” Barclay’s analysts said.
“Existing adviser networks may wish to use robo-advice as means of servicing the lower asset end of their client base in preparation for them becoming the high net worth customers of the future.”
Asset managers likely to expand into more robo-advice
The UK fund management industry has seen fees fall for a number of years now, due in part to factors such as the Retail Distribution Review.
Barclays believes that one response to this would be for asset management houses or life insurers with fund business to expand into advice in a bid to get closer to the consumer.
“Robo-advice would appear to offer an attractive low cost means of achieving this. Established players therefore are likely to face three options: i) partner up with an existing robo-advice provider; ii) develop an offering in-house which may bring about channel conflict; or iii) acquire an existing robo-advice proposition.”
Moves of this kind have already been seen in the US.
Developments in US robo-advice space
Source: Barclays
Fidelity partnered up with Betterment Institutional in 2015 but is currently looking at launching its own in-house offering with both Vanguard and Charles Schwab have developed in-house offerings. However, Barclays expects the acquisition option may become more prevalent in the UK to accelerate speed to market.
There always will be a human-based part of the advice market
While some might see the rise of robo-advice as contributing to the demise of the advice industry, Barclays concludes that there will always be a human element to this – especially in the case of more affluent clients, who tend to have more complex needs for estate and retirement planning.
“Robo-advice solutions are unlikely to be able to cope with the specifics or tailoring required by a customer’s unique set up circumstances. Furthermore, certain product benefits may have to be sold to customers rather than there being naturally strong demand (complex life and health assurance products could be an example),” the analysts said.
“This tailoring therefore potentially represents an effective barrier to competition. Established advice players are, in our opinion, likely to move further upmarket, servicing their affluent customers with face-to-face services in response to the threat from robo-advice at the lower end.”
