Skip to the content

Five advantages and five disadvantages that could come with robo-advice

23 June 2016

Robo-advice has been suggested a way to bridge the advice gap and simplify how people manage their financial affairs but the service is likely to face some challenges in its early days.

By Gary Jackson,

Editor, FE Trustnet

Investors could benefit from lower and more transparent fees as well as greater simplicity through the roll-out of robo-advice, according to a report from Barclays, although issues such as limited service offerings and the need to build trust in new business could impact its early days.

Robo-advice, 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, is still entering the mainstream in the UK having been pioneered in the US.

At its fifth annual UK savings conference, Barclays looked at the future of robo-advice and highlighted the advantages that could arise from it – as well as some of the disadvantages.


Possible advantages of robo-advice

Robo-advice has a strong chance of being an important development in financial services – especially for those that currently feel as those they cannot afford financial advice – and in a recent article we looked at how it could potentially shake up the investment advice market.

Barclays says there are five potential advantages that robo-advice could offer over the traditional face-to-face advice model.

 

Lower fee structure

One of the major attractions to robo-advice is the promise of lower fees for the end investors, especially those who are deemed to have fallen into the ‘advice gap’ in the wake of the Retail Distribution Review (RDR).

Where are robo-advice fees likely to trend in 5yrs’ time?

 

Source: Barclays Audience Response System

“By lowering the fee structuring and keeping operating costs tight through greater use of technology, these models have the potential to more genuinely open up the lower mass affluent market for advice,” Barclays said.

“Fee structure of US robo-advice players have typically been in the range 25 to 35 basis points depending upon degree of tailoring and additional services.”

 

Fee transparency

Robo-advisers often promote themselves as being far more transparent than traditional wealth models when it comes to the cost of advice. This may be an especially attractive feature for clients keeping a close eye on costs at all levels of the investment process.

“The fees they charge are for the most part displayed front and centre in their advertising materials,” the bank’s analysts said. “Traditional pre-RDR UK models were remunerated via trail commissions and hence fee structure was more hidden.”


Increased simplicity

The fact that robo-advice services tend to relatively young offerings and have been created with the modern advice world very much in mind. Furthermore, they have been built as online products from the start with the aim of being simple to use and understand.

“Robo-advice models have been built from scratch with a focus on jargon-busting and increased simplicity for savings decisions. Their websites appear easy to navigate and understand to encourage greater customer engagement,” the report said.

“In contrast, more traditional models are likely to have bolted-on post crisis regulatory requirements and disclosures to pre-existing service propositions.”

 

Targeted offering to millennials/Generation Y

Barclays notes that the financial adviser in the UK is in their late 40s/early 50s. They have tended to react to the challenges created by RDR by targeting the more affluent baby boomer part of their customer base rather than focusing on the less lucrative, younger client.

“As such, millennials or Generation Y have not traditionally been a targeted customer segment by the UK asset or wealth management industry,” the bank added.

“In particular, it may be harder for advisors in their 50s to relate to the needs of younger clients. Robo-advice propositions are being built initially actively targeting millennials or Generation Y.”

 

Access and anonymity

The internet revolutions means that clients are more used to their demands for information and services being serviced more or less immediately. In addition, they can often be done with a degree of privacy – or at least without the need to physical interact with another human.

Robo-advice has the potential to service this need for constant access and anonymity, according to Barclays.

“In contrast to human face to face advice, robo-advice services can be access 24/7 to suit the customer’s needs. The anonymity of robo-advice may also make it more attractive to individuals who find it uncomfortable giving all their wealth details to a person often whom they might know personally.”

 

Possible disadvantages of robo-advice

But Barclays concedes that there are a number of potential downsides that come along with robo-advice, especially in the model’s early days.

 

Limits to service offering

Barclays highlights that current robo-advice service in the UK offer little more than a model portfolio service. This can be limiting to investors with specific aims, such as those saving for multiple targets or those with a wish to stay away from certain parts of the market.

“The UK robo-advice solutions offered so far are quite limited around model portfolio builders and are incapable of handling anything more tailored or specific to the individual’s circumstances,” the bank’s report said.

 

Distribution difficulties

Given the model is a newcomer to the UK, there may be challenges in growing distribution in the early years – especially while it continues to be seen as a non-mainstream service.

“The proportion of assets that these robo-advice offerings represent, even in the US where they have been established earlier, are minimal compared to the size of the industry,” Barclays said. “As such, customer acquisition and distribution may prove a significant issue to the expansion of the early pioneers.”

 

Narrow customer appeal

Linked to the above, many believe that the main uptake for robo-advice will be among ‘tech savvy millennials’ – particularly as they are the group most likely to have been neglected or under-served by more traditional wealth models.


However, this disadvantage may not be in place for long. Barclays’ report said: “Broadening the appeal to more mainstream mass affluent customers may bring these new entrants more directly into competition with established players.”

“However, this argument could be akin to the perception of DIY investors or purchasers of online shopping; it is fallacy that these are only dominated by the young and tech savvy. Very quickly with simplicity of use the silver surfer generation have also become avid users of such online services.”

 

Brand trust issue

Barclays added: “Unlike a one-off transaction (e.g. for online FX or equity trading) consumers are looking for a long-term partner for managing their retirement wealth.”

Who are the winners of tomorrow in robo-advice?

 

Source: Barclays Audience Response System

“Consumers need confidence that the advice provider is likely to be around in 20-30 years’ time when they enter their decumulation phase. The lack of established track record and associated brand may therefore hinder robo-advice expansion.”

 

Untested in a market downturn

While one of the appeals of robo-advice is that it removes some of the emotion from investing, conventional wisdom would suggest that human advisers are better than automated services at convincing customers to stay invested and weather out market downturns.

“Robo-advice may therefore be good at growing its asset base in periods of rising markets but redemptions may be high in downturns,” Barclays concluded.

“We believe the sophistication of controls around this are likely to improve in the future. A client about to redeem could be referred to information about the merits of staying invested for the longer term.”

ALT_TAG

Editor's Picks

Loading...

Videos from BNY Mellon Investment Management

Loading...

Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.