It is an understatement to say the New Model Adviser® website comments sections host lively discussions, but the reaction to our series of videos on robo-advice was particularly intriguing.
The three ‘pimply youths’, as one commenter labelled them, directors of three of Europe’s most successful digital wealth firms, came to our offices to debate the future of online investment and advice. The discussion clearly ruffled a few feathers.
We divided the discussion into three parts, covering issues such as restriction versus independence and guidance; how the profession will evolve due to technological innovation; and how tech-based offerings could keep up with tough regulatory demands.
Guidance or advice?
The Financial Conduct Authority (FCA) recently sought to shore up the distinction between advice and guidance.
Only Dapra characterised his proposition as regulated advice, while all three were reluctant to embrace the term ‘robo-advice’ in general.
Bornman said: ‘The term robo-advice is probably a bit of a misnomer, having originated in the US, where investment management and advice are very integrated.
‘We only focus on online discretionary management, so we don’t offer advice. The new clear definition is great. There is a much more uniform view of what is considered guidance and what is considered advice.
‘Having said that, research indicates a lot of firms don’t know what the economic benefit is going to be around that. Some firms have said they will save £4,000 a year, while others have indicated £70,000 a year.’
Bornman (pictured above) said ETFmatic’s model was to stick to discretionary investment management and establish partnerships with advisers through its business-to-business offering.
Moneyfarm, on the other hand, unlike most online investment firms in the market, does offer regulated advice.
‘Do we do something radically different to everybody else to be classified as advice versus guidance? Probably not,’ said Dapra.
‘But our core value proposition is to expand the advice bit. You can play around with the jargon, but ultimately if you provide advice, the customer is more protected.’
French, whose firm also focuses on investment management rather than advice, suggested advice was not the ‘cleanest’ term, and took aim at restricted advice as being the same as ‘walking into a Mercedes-Benz garage and asking for advice on which car you should buy’.
He said: ‘It is not as black and white as “advice versus guidance”. I hope we don’t see too many restricted advice propositions where clients are sold very expensive products, because there are better alternatives.’
French also had a problem with guidance, suggesting the discretionary investment management model was closer to advice, since it was subject to the same suitability requirements.
Reactions on the New Model Adviser® website took the car dealership analogy and ran with it, with one respondent commenting: ‘The key issue is whether the client knows they are in a Mercedes garage when asking what car to buy. If they know they are, one can assume they want a Mercedes and are asking the question within the Mercedes range implied.
‘If they don’t, they should be guided to Which? or Auto Trader for example, but don’t stop the Mercedes dealers pitching their cars at the same time. It doesn’t mean their cars aren’t suitable. Clients have to take some responsibility for their decisions.’
Other responses were more tongue in cheek:
The future of advice
We asked the panel whether they thought there was a future for any current IFA business that did not adopt some kind of automated solution.
‘The business model has to change,’ said Dapra. ‘It is a matter of cost. You cannot serve a customer charging 3%. It is just not going to work in the next 10 or 20 years, because we are probably not going to be able to generate those kind of returns.’
He suggested technology was the only means of delivering the same service for less.
Bornman said the most important question, in the medium term, was where the client engagement from an adviser occurred, and to what extent consumers would want it.
‘In the medium term there will always be an individual who wants human engagement,’ he said. ‘But coming to the long-term answer, more and more people will be much more comfortable to engage only with technology.’
French (pictured above) wondered whether the UK’s 20,000 or so advisers could realistically serve everyone who needs advice.
‘If you think about ageing demographics and lower returns, advice will be required for a lot of people to be able to retire the way they want to, to live the lifestyle they thought they could, so it’s coming,’ he said.
He added: ‘As the next generation of wealth creators become savers and investors, they won’t demand face-to-face advice, they will demand the same services they get everywhere else, which is automated, convenient, and just gets stuff done.’
Slapdash for cash?
The panel’s remarks were a red rag to a bull in the comments section.
One commenter went as far as to assert that ‘robo-advice will be dead in the water within two to three years’.
Simon Munday, principal of East Sussex-based Prosperity IFA backed the three robo firms, writing: ‘Those that adapt and change will be the successful ones and the ones that multigenerational clients will seek out in the future. Long live the people who hate change; it makes my life much easier.’
However, one colourful post stood head and shoulders above the rest:
Suitability and simplicity
A frequent criticism of robo-advice firms is the alleged oversimplification of client questionnaires and ‘know your customer’ (KYC) procedures. Online firms face a dilemma reconciling a thorough questionnaire with a succinct process.
French was staunch in his defence of automation on suitability. ‘Technology allows for two things that don’t happen right now in the human adviser world: consistency and integrity, along with the ability to test.’
French said his questionnaire was tested again and again, both by clients who ended up becoming invested with the firm and those who did not. This was key in mitigating the risk that consistency also means if something is wrong, it is consistently wrong. The firm undertakes regular user testing and works with university behavioural science departments to develop and improve its service.
He added: ‘I’m happy that people who go through the same process end up with the same result. If you go into the offline world and speak to five different advisers, you will get five different investment strategies, which on the face of it probably aren’t as good as they could be, because they are also invested in relatively high costing products.’
Bornman said automated investment firms were held to a very high standard to demonstrate stringent KYC compliance. He said this resulted in clients ending up with robust portfolios where the risk was mitigated.
He explained: ‘Ultimately clients get a diversified portfolio of exchange-traded funds, and a diversified asset allocation. On an execution-only platform, you can invest in anything, so there is less risk than with other business models.’
The entire process is tailored to the individual through the greater capacity of technology to gather client data, Bornman explained, making the process more simple for the client while remaining reliable and suitable.
‘We have many more data points than the traditional adviser,’ said Dapra (pictured above). ‘Although there is a need for personalisation, we are not that different as human beings. You can only go from zero to 100% equities, so by offering a fully diversified portfolio for low cost, you still put the customer in the best position possible to succeed over the long term.’
French added that the highest risk category in Scalable’s fully risk-managed, globally-diversified portfolios carried less risk than the FTSE 100.
The comments for the final part of our discussion were equally fiery, with one labelling the panel ‘geeks pushing their dystopian vision of a future world’ and making the case that advice is a ‘people’ business.
This was countered by a defender of the ‘geeks’, who labelled his adversary a ‘miserable old cynic’.
Here to stay
With both Scalable and Moneyfarm recently securing significant investment and developing pension products, and ETFmatic now covering most of Europe, with over 100,000 downloads of its app, the three firms do not look to be going away any time soon.
Advisers intending to service future generations are now searching for ways to leverage technology to cut costs and access more clients.
The majority of robo-advice firms are not trying to ‘steal advisers’ lunch’, so to speak, and it will be interesting to see how those automated services that survive can align themselves with the IFA market.
Watch the videos and comment for yourself below.