Can robo-advisors stand the test of time?
Robo-advisors are becoming increasingly commonplace in the UK’s financial sector. Over the last 18 months, high street banks such as Barclays, Lloyds, Santander and RBS have all launched robo-advice platforms, and it’s not only these well-known names that are competing to own the online investment space. Smaller challenger brands like Nutmeg and Wealthfront have also had a significant impact on the market, claiming they can provide a cheaper, more accessible service.
In fact, with the FCA recently announcing it will build an Advice Unit to help firms develop robo-advisor models, it’s clear that those in the know expect this steady momentum to continue. However, although the promise of savings may initially seem tempting, can we really expect this new technology to provide a service equal to what’s currently provided by experts in the investment field?
Humans versus robots
Acquiring and managing customer assets is expensive, and traditional operations surrounding investment products reflects this. Often, wealth managers have approached challenges with an industrial approach, using a factory to create products and a distribution network to market them.
Professionals are employed by the product factory, designing investment strategies with expertise. A long value chain spans from risk management to back office, and compliance packages the product. Sales teams then push the end result out with savvy marketing strategies, claiming that they best serve the end-customers’ needs. However, there is not always a clear cut best product – there’s often a conflict between what really suits the customer and what generates the higher revenues for the sales team, resulting in debate.
Nutmeg, for instance, applies some evolution to this approach. The sales team is replaced by an intuitive online interface which works independently from the product factory. This dispenses of the internal debates that so often face traditional investment products.
Unlike other providers, these new platforms have no conflict of interest: they own no product and their experts pick, out of the options on offer, the cheapest that meet customers’ needs. Other painful product features, such as lock in periods, are thankfully kept to a minimum.
Robo-advisors are arguably more efficient than human distribution networks: the online interface serves millions at a marginal cost. They are unbiased, and they are run by independent experts, for the customers, rather than companies.
Does time really mean money?
While robo-advisors claim to be “cutting out the sales middle man”, they still rely on much of the traditional infrastructure they claim to disrupt.
Firstly, they still use self-appointed experts. Once we remove savings from the equation, what makes Nutmeg’s experts better than other experts? While no one can deny that cost reduction is valuable, these experts can do little to prove their credibility and expertise. As a result, it’s worth remembering that you’re getting little – if anything – extra by using this new technology.
Secondly, while these new interfaces may look slick, they present no new products. Ford once changed the car industry by offering an affordable car anyone could have in any colour they wanted – as long as it was black. Nutmeg presents products beautifully, and allocates customer assets with customers’ interest in mind, but ultimately in the very same factory products.
It feels somewhat audacious, then, to announce the replacement of traditional providers. Robo-advisors may disrupt the industry, but other than the risk of cannibalising products and existing profitable customer-relationships, nothing stops incumbents from adding robo-advisors to their suite of sales channels – we’ve already seen the banks exploring this area.
Once this happens, VC funded robo-advisors may struggle the old-fashioned way: making the numbers work. To date, substantial funding has poured into new entrants with a simple premise assumption. Because customers have been traditionally loyal for, luring new customers away from banks with ads is hard. Whether or not this assumption holds once switching becomes easier – and propensity to switch increases – is another question. If customer loyalty is eroded, how will robo-advisors economics work, especially as they purchase their product from the very wealth-managers and banks they compete with?
So, while robo-advisors can currently offer cheaper online rates, and are arguably a better model for customers, the real weakness of platforms such as Nutmeg is that they are so easily replicated. Other VCs can, and probably will, fund more intuitive clones of these interfaces, creating ever more ingenious campaigns, and eroding the assumption that customers will remain “sticky”.
The long road ahead
With new technology, it’s becoming easier to move away from the elitist nature of investment. Robo-advisors offer a genuine opportunity to begin breaking down the “old boys” culture of investing, but we need to remember that they only represent part of the problem: distribution. Regrettably, the factory remains, and while getting advice from a robot may be cheaper for now, it’s difficult to predict whether this will be a credible way to save money in the long run.
Juan Colón, CEO and founder of Darwinex