An ageing population, low interest rates and an uncertain economic outlook, not to mention the introduction of pension freedoms, mean that the need for financial advisory services in the UK has never been greater. However, advances in technology are increasingly altering the way in which such financial advice is being delivered to consumers. One such area is robo advice which, although still a nascent industry in the UK, has gained significant traction in recent years.
But where do these changes leave traditional asset managers and how can they best utilise robo advice to enhance their businesses and provide robust advisory services?
Utilising robo advice
Although, initially, viewed by many asset managers as a threat, more and more established firms are now re-engineering their business models in order to incorporate robo advice. The potential for growth and the success already achieved by robo advice innovators in the US, such as Betterment and WealthFront, has not gone unnoticed. In fact, of late, some big names in the asset management industry such as Blackrock, Charles Schwab and Vanguard, who have come to recognise the benefits that robo advice can bring, have entered the market either by acquiring or launching their own online robo advice proposition alongside their traditional investment advisory business.
Historically, asset managers have been used by wealthy individuals with larger funds to invest. However, many younger investors, who are interested in accumulating wealth but who have only limited resources to invest, are looking for greater flexibility and instant, low cost access to advisory and asset management services.
Robo advice can help here by enabling asset managers to engage effectively with a new generation of investors, those who have never considered using traditional asset management services or who have been put off by the high level of costs of face to face advice. Potentially, robo advice can enable asset managers to provide affordable, efficient and accessible advice to such individuals on how to manage their assets.
Additionally, as these individuals mature and build up more and more assets, they will begin to represent a significant business growth opportunity for asset managers in the future.
In order to be effective, asset managers need to be able to meet their customers’ needs whenever and wherever their customers desire, including the ability to review their portfolio or instantly talk to an adviser. This includes integrating any robo advice proposition with other channels in order to cater for differing customer requirements and choice and enabling investors to migrate from one service to another if their preferences change. The main opportunity, therefore, is to build an integrated digital process that can work seamlessly across remote and one-to-one channels.
In developing such a process, it is very important to remember that regulation remains a key criterion. Whilst the FCA is supportive, in principle, of robo advice it has also made it completely clear that there is to be no relaxation whatsoever of the regulatory threshold as far as suitability is concerned. In fact, the suitability standard for robo advice remains basically just as high as it is for face to face advice.
As a result, most of the pure robo advice propositions that have emerged so far in the UK have adopted regulatory outsourcing. With this approach, the supplier of the robo advice software does not actually give the advice. The regulatory risk is taken by the firm using the software with its clients, usually IFA firms, who typically are entrepreneurial by nature and more inclined to take the regulatory risk than large financial institutions.
By acquiring a robo advice proposition with a white-labelling capability, asset managers are able to provide effective support to IFAs, who are a major source of their business. This route has already been taken by some asset managers in the UK such as Aberdeen Asset Management’s acquisition of Parmenion Capital Partners last year.
Finally, whilst many US robo advisers use Exchange Traded Funds (ETFs) rather than actively managed funds in order to help keep costs down, UK robo advice propositions use a wide range ETF, passive unit trusts and risk managed funds. Consequently, to enable advisers to put robust processes to be put in place, asset managers need to ensure that the right mix of funds form part of any robo advice solution.
Robo advice is clearly one of the biggest trends to affect the asset management industry in recent times. As such, it is those forward thinking asset managers who are able to effectively implement robo advice solutions, whilst maintaining quality customer service, who will succeed in this new digital era.