Despite being relatively new in the UK, robo advice has been around in the USA for many years. Primarily focusing on providing personalised portfolio recommendations, the US market was born out of a host of small start-up companies using automation to select investments that meet the consumer’s risk profile and investment goals.
Having a recognisable brand, and/or access to large existing investor databases, is clearly a key requirement for success
Do not underestimate the difficulty in delivering an engaging experience for consumers whilst at the same time satisfying regulatory standards
Established companies should provide multi-channel advice services to meet their customers ever changing needs
In order to build up their businesses, these emerging companies sought out venture capital yet, today, only a tiny number of them, possibly Betterment and Wealthfront, have managed to successfully build up enough assets under management required to have a credible chance of long term survival.
Meanwhile, although, initially, seen by many US advisers as a threat, more and more established firms are now re-engineering their business models in order to incorporate robo advice. In fact, of late, some big names such as BlackRock, Charles Schwab and Vanguard have entered the market either by acquiring or launching their own online robo advice propositions alongside their traditional investment advisory businesses.
Lessons from the US
Despite the fact that specialist start-ups Betterment and Wealthfront had a 7 year start on Schwab and Vanguard, these two big brands have rapidly outstripped the pioneering fintech companies. In just over a year, Schwab has accumulated assets under management of more than twice as much as either Betterment or Wealthfront. Even more impressively, over the same timeframe, Vanguard has surged past everyone and has twice the robo funds under management of both of Betterment and Wealthfront put together. The importance of having an established and trusted brand and a strong position in the retail investment marketplace is, therefore, abundantly clear.
Lesson 1 – Having a recognisable brand, and/or access to large existing investor databases, is clearly a key requirement for success.
As a result, shrewd fintech start-ups quickly began to realise that in order to survive many would have to change their market strategy from solely offering robo advice direct to consumers to providing a white labelled solution for advisers. Start-ups, such as SigFig, have ultimately agreed to provide robo advice solutions to certain large financial institutions that neither have the expertise nor the technical knowhow to build their own. Such white labelled options have enabled many US adviser firms to create an alternative advice option for younger less wealthy customers, providing these customers with the opportunity to migrate from robo advice to full advice when necessary whilst, at the same time, cutting customer acquisition costs and improving the efficiency of the advice process as a whole.
Lesson 2 – To consolidate their position, start-up companies should align themselves with well-known brands by providing white labelled robo advice solutions.
Established institutions are also able to integrate robo advice with other channels to cater for differing consumer needs and choices. For example, Charles Schwab offers a pure robo advice service alongside advice from financial consultants and a self-directed brokerage business. There is also the ability to migrate from one service to another if consumers’ preferences change.
Lesson 3 – Established companies should provide multi-channel advice services to meet their customers ever changing needs.
When it comes to regulation, superficially, at least, it would appear that the US has a similar regulatory environment to the UK, requiring advisers to “know your customer” and to ensure the suitability of recommendations. However, without exception, US robos adopt a very light touch approach, concerned that if customers are required to answer too many questions then they will be turned off the whole process. As a result, some critical areas which strike right at the heart of suitability, such as debt levels, affordability and access to emergency funds, are completely ignored. Can it be right to recommend an investment portfolio to a consumer who has existing expensive short term debts?
Concerns are, therefore, mounting about the regulatory standing of current US robo advice solutions. Consequently, if regulatory and legal challenges were to occur in the future, robo advice in the US could suffer a serious and, potentially, irreparable reputational setback.
Lesson 4 – Do not underestimate the difficulty in delivering an engaging experience for consumers whilst at the same time satisfying regulatory standards.
Finally, many robo advice solutions differentiate themselves not only on price but also via their customer experience. Much use has already been made of behavioural finance techniques in the design of user interfaces and the development of a range of innovative ways that robo advisers can interact with consumers on an ongoing basis. Given the high cost of acquiring customers, particularly for start-ups, a key requirement is to avoid having any lapse in business.
Lesson 5 – Research has shown that communications should be adjusted for different types of customer in order to improve retention rates.
Clearly, there are many insightful and compelling lessons that can be learned from the US’s experience of robo advice. As such, the financial services industry here in the UK would be wise to take note!
More on Robo Advice as the catalyst for transformational change
EValue recently released our latest White Paper, ‘Robo Advice – The catalyst for transformational change’. This paper looks at market developments to date, lessons that can be learned from the US, the potential impact that Robo could have on distribution in the UK and reviews some consumer research on different robo propositions currently available in the UK.