Is robo advice the end of wealth management?

Written by: Richard Willsher Posted: 23/11/2017

BL53_roboWarren Buffett has long held the view that the only thing you can be sure of when it comes to fund managers is their fees. Could robo advisers replace them and provide better value for money?

Research from S&P Dow Jones Indices, among others, regularly concludes that a majority of active fund managers fail to meet the benchmarks they set for themselves. Investors putting money into passive tracker funds can at least be sure that performance will match their indices – for better or for worse. Hence the extraordinary growth in the use of index tracking exchange traded funds (ETFs).

The key is choosing the right ETF, or other tracker fund, to invest in. What’s missing for many private investors is the ability to make that choice – and that’s where financial advisers and wealth managers of various hues come in. 

But what if such decisions could be made more quickly and cheaply using a computer algorithm? This is what most so-called ‘robo advisers’ do. They ‘on-board’ an investor by querying his or her appetite for risk and then offer a selection of funds that match these criteria. 

Take Wealthify, for example, which says: ‘Create a plan by choosing your investment style and how much you want to invest. You can start investing with just £1’. Its plans may comprise a number of funds, and asset allocation will be among those invested in cash, cash equivalents, shares, property, government bonds, corporate bonds, commodities and alternatives.

Wealthify resembles many other robo offerings, including Nutmeg and Moneyfarm as well as those offered by established banking and investment brands such as UBS and Investec. 

But not all robos are the same. Take Investec’s Click & Invest, which launched earlier this year. This uses a similar on-boarding process to determine what sort of investor you are and recommends an investment strategy. 

The fees are on a sliding scale – starting at 0.65 per cent for the first £100,000 invested and reducing in stages to £250,000, where the cost falls to 0.35 per cent. However, you have to have £10,000 to open an account. 

This seems to put paid to the notion that robo advice is great for those with smaller amounts to invest, who can’t afford financial advisers’ hefty fees, but won’t appeal to those wealthier clients with the cash to pay for a more personal, kid-gloved treatment. The cat seems to be out of the bag.

The investment industry, having developed a low-cost, hi-tech solution to handling smaller clients, is now faced with clients of all wealth levels who expect tech every time. And it’s putting pressure on some providers, who simply can’t keep up with the new technology. 

Research released in June 2016 by consultancy Capgemini found investment firms that didn’t have the latest tech were losing business. It reported: ‘Up to 56 per cent of [investment] firms’ net income could be at risk due to client attrition due to lacking digital capabilities’.

And ‘more than half of wealth managers (55 per cent) aren’t fully satisfied with their firm’s digital capabilities, and consequently over a third (39 per cent) would even consider looking for employment elsewhere’.

Shifting sands

So, is this the end of wealth management as we know it? “Yes and no,” answers Alexis Calla, Global Head, Investment Advisory and Strategy, Wealth Management at Standard Chartered Bank, based in Singapore. “We believe that a combination of factors will continue to require wealth managers to change their game. However, this fundamentally is still about helping clients invest their life savings wisely, to manage emotions and stay the course during down markets. 

“The traditional expertise of wealth managers, as such, will continue to be an asset. This is especially so in Asia, where the majority of the client base is still with banks, as these institutions are strong brands and distributors. The commercial viability of the robo advisers and fintech is yet to be proven.”

Vassilis Papaioannou, Chief Investment Officer at London-based investment adviser Dolfin, is convinced that the arrival of robo tools improves efficiency in the market. “By bringing costs down, making more objective decisions and by filtering the asset class universe, it will definitely take a front seat among clients’ priorities and choices,” he says. “However, there is a role for the discretionary adviser who has the expertise to take the output of the robo adviser and refine it. 

“But as a starting point, a robo system can replace a human eye and run a million checks and do complex calculations – and that has to be the way forward. So, you can follow the robo route to take you down a purely quantitative investment path or you can factor in a human, discretionary function.”

Distortions and bear markets

One of the worrying aspects of the way in which algorithms work is that they may all do the same things at the same time. While there are checks and balances, and stop-losses available, a massive ETF bubble may well be emerging – one which, in essence, is driven by automatic trading mechanisms. 

For example, it’s possible to look at the momentum that’s driven up the major tech stocks in the US. Many ETFs, whether they’re tracking major indices or tech indices or other criteria, are forcing stock prices to stratospheric levels. 

The result is self-fulfilling. As the prices of the big five – Alphabet, Amazon, Apple, Facebook and Microsoft – increase, they cause indices to be rebalanced. This, in turn, causes further momentum-driven funds to follow the charge and drive their prices even higher. 

What happens, then, when an algorithmic switch in the mechanics of ETFs, and indeed in robo advisers, says it’s time to sell? There’s almost bound to be an automatic and catastrophic sell-off that may accelerate into a crash. 

Other unknowns are how robo advisers will behave in bear markets. And how they will they cope in times of technical failure. The recent case of Barclays’ switch to its new DIY investment platform, Barclays Smart Investor, proved that it really wasn’t so smart. The UK bank is said to have been haemorrhaging clients, who are disenchanted by its tech incompetence. 

So far, however, we haven’t witnessed a serious accident. Moreover, as Vassilis Papaioannou explains, the regulator, the Financial Conduct Authority, needs to be assured that a firm’s robo offering is fit for purpose and that the provider is offering a transparent solution, not just selling access to a black box. 

Good news for investors, perhaps, but the regulators, central bankers and governments failed to spot and prevent the bubbles and excesses that caused the last financial crisis. Will they be any better at preventing the next one?

It’s still relatively early days for robo advice, however. The chances are that when we look back at today’s market five or 10 years down the line, we’ll view the current robo offerings as quite crude. Innovation, largely by fintech firms in the financial services sector, is fast and furious. On-boarding and asset/fund selection are relatively simple processes to automate, compared with the behavioural aspects of client management. 

Perhaps future innovations will make inroads into human behaviour and offer more client-sensitive investment solutions.

So, to our core contention: does robo advice spell the end of wealth management? Well, as an industry, no, because investors will always need routes to invest. But maybe the sun is setting on the age of the purely personalised advisory service. Technology brings greater efficiencies, and firms that don’t adopt it are bound to feel the squeeze at the margin unless the client is willing to pay for traditional human hand-holding. 

It may come down to value for money, which could mean that established wealth managers will be called upon to justify their approach in pounds and pence.

Could robo get it wrong?

A Harvard Business Review article in April said: ‘Every day, consumers experience more common shortcomings of artificial intelligence (AI): spam filters block important emails, GPS provides faulty directions, machine translations corrupt the meaning of phrases, autocorrect replaces a desired word with a wrong one, biometric systems misrecognise people, transcription software fails to capture what is being said. Overall, it is harder to find examples of AIs that don’t fail.
‘Analysing the list of AI failures, we can arrive at a simple generalisation: an AI designed to do X will eventually fail to do X.’
This is worrying. The annals of recent ‘flash crashes’ are worrying too: May 2010’s 1,000-point drop in the Dow Jones Industrial Average; October 2013’s US$6.9bn market capitalisation loss on the Singapore Stock Exchange; October 2016’s six per cent drop in the value of sterling against the US dollar, to name but three. Often the causes of such events have been shrouded in uncertainty, but ascribed in some degree to computer failure, malign cyberattack or automated trading misfiring.
Investors considering the strengths, weaknesses, opportunities and threats of robo advice should also factor in the possibility of technology failing. Putting all your investment eggs in a robo basket seems an unwise asset allocation.

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