The UK Robo-Advice Innovation Forum: key takeaways
It was a pleasure recently to be asked to chair the UK Robo-Advice Innovation Forum, which was supported by Banking Technology.
(And brilliantly curated by City & Financial.)
I thought it best to distil some of the debates and discussions and show how robo-advice is changing wealth management and indeed impacting the banking sector.
An important factor was the emergence of the High Street banks as players on the scene – it seems that the incumbents are preparing to embrace robo-advice in a big way!
These developments will soon be more visible at branch level, with Santander and HSBC both demonstrating robo-advice propositions. These firms look at creating a digital wealth platform as not just a way of increasing customer engagement but as a revenue centre in their own right.
A prediction emerged that legacy financial institutions are the necessary next step for UK robo-advice to go from under 100,000 customers to over ten million. Dean Butler from HSBC gave an excellent introduction to the incumbent approach and how banking technology can be used to create new revenue streams.
To create a digital wealth manager is not just a matter of investment or risk management, but a wide array of specialities are needed. For banks entering the market, the most important, but not the only, factors are:
- Compliance – the product must be suitable, as the UK regulator Financial Conduct Authority (FCA) defines it, for the client and the technology must ensure that this is the case.
- Investment process – likely to be more important as the industry matures and user experience (UX) becomes commoditised. Most solutions utilise the modern portfolio theory but other solutions utilising liability driven investment (LDI) are coming to market.
- User experience (UX) – the front-end and digital engagement module. This must be FCA-compliant and refer back to other modules. But as the “shop window” should be used to increase client acquisition and retention by ensuring a smooth customer journey.
The opening presentation was from Janine Menasakanian from Vanguard who are rapidly becoming the world’s largest asset manager, using a low-cost scalable model. The firm are not just disrupting financial advice, with their lifestyle funds, but also work in tandem with financial advisors to create even more value for end-users.
She introduced and explained the concept of Advisor Alpha. The presentation sought to show the value advisors can and do provide to the retail market. A great deal of quantitative research has been done by Vanguard and others to show the benefits independent financial advisors (IFAs) can bring, with contributions such as behavioural coaching to help clients avoid wealth destruction and stick to investment plans, potentially creating as much as 3% of value per year. This combined with the low-cost implementation available on Vanguard’s platform creates a “man and machine” approach with a strong competitive position. Indeed, the UK press described it as disrupting the market.
For us the day demonstrated the importance of pensions, with nearly every panel mentioning the theme and all players developing a self-invested pension plan (SIPP) product. Globally, robe-advisors (or standalone robo-advising firms at least) have struggled with profitability, and access to the wider pensions market, which has much greater scale, could change this.
With customer acquisition costs falling and higher revenues available in the pensions market, profitability could be in reach, although I doubt any robo-advisor will turn a profit in 2018. It will be interesting to see if the market for robo-advice embraces the aforementioned LDI in the way the wholesale markets have. Pensions will become the most important part of the robo offering, and while currently LDI captures 90% of the institutional pensions market, in retail space RiskSave is at present the only robo-advisor to demonstrate an LDI framework.
- The banks are coming and will quickly take market share. With Nutmeg claiming majority market share with less than 50,000 customers, banks accessing millions of customers will quickly grow the market.
- Exchange-traded fund (ETF) providers and investment managers interacting with advisors can create even more value. The “man and machine” approach may be best.
- Developing a pensions or SIPP product could triple the total addressable market (TAM) showing a clear route to profitability for the currently loss-making robo-advice community.
- A pension offering could see LDI frameworks finally reach the retail market.
- The digital asset management community doesn’t like the term “robo-advisor” as confusingly many do not give “regulated advice” and of course and disappointingly, there are no robots!
By Daniel Tammas-Hastings, founder and CEO of RiskSave Technologies