As with any disruption to a traditional model, the key is flexibility.

Flexibility in understanding how the emergence of online investment services affects and attracts different types of existing and new customers: younger investors (tomorrow’s clients) expect core investment services to be online, interactive and ubiquitous. This is not incompatible with face to face meetings on more strategic matters.

Flexibility in thinking how to interlace traditional services with online services – to suit client needs. It’s not a case of offering one thing or another. It’s a case of servicing different needs in different ways, so that the adviser achieves one core aim: to retain the customer’s positive view.  Retaining the customer’s positive view means maintaining a customer relationship.

Played well the integration of online-only investment services – be they discretionary, advisory or execution only (there are examples of all three in the UK market) into an advice business model should complement the core proposition of looking after customers.  An adviser's priority, though, is to start looking after tomorrow’s customers, today.

2. What does this mean for existing IFA firms?

The growth in online investment services means advisers need to evaluate whether and how they deliver ‘value add’, and what the characteristics of that value add are.

We believe there is a fundamental difference between added economic value and added emotional value.

Added economic value is the traditional measure – it considers providing superior risk-adjusted performance relative to a given objective.  It can be evaluated through a quantitative process – in pounds, in basis points, in Sharpe ratios. 

However, there has been a rapid growth of asset allocation funds that provide a strategy within a single fund.  Asset allocation funds can be categorised in broad terms by their objectives such as relative volatility, target volatility, target return or target date.  If using these funds then arguably the adviser’s economic added value is therefore not to provide an asset allocation strategy (that is done within the fund), but to ensure the strategy matches customer’s desired – or required – outcomes.  How to get under the bonnet of these funds is a different topic though.

What we define emotional value is a more abstract.  It engages with a different type of thinking around customer needs and interacts with different areas of cognitive reasoning that underpin customer decisions.  Adding emotional value is when advisers have the emotional intelligence to provide reassurance, trust, empathy, and understanding.  Advisers who are valued most by their customers, and who typically have the most successful practices, are those who understand that while a business cannot be built on emotional value alone, without it any economic value goes un-noticed, unappreciated and unvalued.

Robo-advice should be welcomed as a tool for advisers to have in their toolkit.  In 10 years’ time, not to have it would seem as unthinkable as not having a mobile phone.

However, there is nothing that can replace, and nothing that rewards more, the advisers who understand that while business can be built on numbers, its relationships – and the emotions that drive them – that are the cornerstone for success.

Shweta Agarwal, is head of behavioural insights at BirthStar.