The number of robo-advisers has increased exponentially since 2015, but a recent survey has suggested they are failing to attract high net worth (HNW) individuals.
Fixed rate bond provider Minerva Lending reported that only 12% of 1,000 HNW UK investors trust robo-advisers with their investment decisions.
Many robo-advisers, such as Nutmeg, Moneyfarm and Wealthify target clients at the mass market end of the spectrum. Adverts on the London Underground are aimed at hurried commuters, while TV campaigns target millennial investors in their living rooms.
Others such as Netwealth and Scalable Capital, actively target high net worth investors however, and both have reported increasing numbers of clients since launch. (See page 11 on Netwealth)
So what differentiates the two groups and why is there a lack of trust among HNW individuals?
In its infancy
‘Robo-advice is still in its infancy so they are naturally cautious. It’s important to remember some robos offer a hybrid model where you can speak to a person for reassurance and clarification,’ said Anthony Morrow, chief executive officer of eVestor.
The institutions favoured by HNWs – Coutts, which has a history dating back to 1692, Rathbones which launched in 1742 and Brewin Dolphin, going on since 1762 – they all have one thing in common: longevity.
Echoing Morrow, Richard Flax, chief investment officer of Moneyfarm, said: ‘As with any new or relatively new idea in financial services it simply takes time to build brand recognition and trust.’
He sees the only real way to gain HNW’s trust is by simply offering a ‘consistent service with consistent performance, and that is key because these are inherently long-term relationships’.
Building the brand
However, robo-advisers face a unique difficulty in building a consistent brand, according to Morrow.
‘The reason high net worth individuals are reluctant to use robo-advisers is because so few robos actually offer advice. Many providers are not doing what their name implies, and instead, are simply acting as a portal to take investors’ money.
‘Often, these robos simply try to pass off a generic questionnaire as “personalised” advice. This won’t wash with savvy high net worths, they’ve often spent time wisely and patiently building their fortunes and won’t simply plough it into something without reliable and bespoke guidance.
‘I’m confident that if high net worth individuals realised that some robo-advisers actually offered advice, we’d see a rise in the number using these services for investments. They can provide investors with much lower fees, translating into more valuable returns.’
The human touch
The survey also showed that the advice of non-discretionary independent financial advisers was near the top of the list at 72%.
Ross Andrews, director, Minerva Lending, commented: ‘IFAs should be genuinely encouraged that nearly three-quarters of active investors would trust them to make investment decisions on
‘For robo-advisers and software-based investment management tools, the survey results are less uplifting. It seems that far more people with bigger sums to invest trust manual decision-making processes, whether by themselves or an IFA.’ The survey also showed that when making investment decisions, 77% of HNWs trust their own judgement.
Commenting on why IFAs are trusted more than other propositions, Morrow said: ‘Investors with large amounts to deposit also tend to want the comfort of human interaction.’
Meanwhile, Flax believes that the complexity of HNW investors’ issues and assets is the reason they will seek more sophisticated advice. ‘You could say that high net worth investors have – not always but more frequently – more complex affairs than others. The question then is where this complexity really resides? Does the complexity need to reside in the investment solution?
‘We would argue possibly not. It’s more likely to reside in estate planning and tax planning.’
Flax notes that on the whole, most investors favour a well-diversified and low-cost product for their financial market exposure in a long term financial plan. This need spreads across and is appropriate for a very wide range of income brackets and levels of sophistication.
He said: ‘The question then, I would argue for high net worth investors is, are you making sure you’re not paying for unnecessary investment complexity when what you really need is real sophistication around estate planning and tax planning and making a distinction between those components?’