The rise of robo-advisers: what it means for consumers

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Robo-advisers manage investment portfolios based on algorithm-driven automation. Robo-advisers are not, however, computerised financial advice providers. Some, for example, simply place investor money in passive funds which track the movement of stock market indices.

Since their institution in 2012, robo-advisers have enjoyed a stratospheric rise, mainly in the US. Corporate Insight calculated that they managed around £12.4bn globally by the end of last year (a year-on-year increase of around 80 per cent). This surge is predicted to continue apace; MyPrivateBanking Research forecasts that by 2020 the figure will rise to around £166bn.

In the UK, robo-advisers are less prevalent. Nutmeg is currently the only provider offering automated online investment solutions. However, this is likely to change.

Last month, the Financial Conduct Authority (FCA) confirmed it had “laid the groundwork” for more robo-advice firms to enter the UK market.

Low cost and easy access

Martin Bamford, a financial planner at Informed Choice, believes robo-advice meets a growing demand for low-cost, easily accessible investment advice.

“Robo-advice can contribute towards making investment advice more accessible – and affordable – to the masses,” he says.

Professional advisers can charge sizeable fees, both for management and performance. While robo-advice fees vary from provider to provider, they are generally around 0.5 per cent annually.

“Human advisers charging that little simply don’t exist,” says Bamford.

The democratisation of advice is undoubtedly a key point of attraction for many. Young or low-net-worth investors are often priced out of the professional advice market due to high minimum asset requirements, and effectively forced into DIY investing.

Despite robo-advice being a relatively new concept, automated investment management is not in itself novel. Many of the processes used by robo-advisers do not differ from software that has been used by wealth managers for some time. Now, however, consumers can directly access this software, rather than needing to employ a human adviser.

Shaun Port of Nutmeg believes that the proliferation of robo-advisers is the result of a generational shift.

“Today’s investors are digitally savvy, and instinctively turn to the internet for advice and guidance on almost everything,” he says.

“They’ve also become accustomed to managing many of their affairs on the web – whether it’s checking bank statements, making purchases or paying bills. It’s only natural that people are increasingly comfortable with taking their investments online.”

End of face-to-face advice?

It is perhaps unsurprising, then, that their growth has provoked unease in financial advisers. But could robo-advisers spell the eventual end of face-to-face advice?

For Matt Phillips, managing director of Thomas Miller Investment, suggestions of the impending death of traditional advice are greatly exaggerated. He believes technological innovation will enable more human interaction, not less – and sees wealth managers working alongside robo-advisers in future.

“The rise of the robo-adviser is a positive for consumers and advisers alike. It’ll mean more people will engage in savings and investments – and that can only lead to more opportunities for advisers,” says Phillips.

“Robo-advice should be welcomed by all, not feared.”

Phillips’ sentiments are shared by Lee Robertson of wealth management firm Investment Quorum, who believes the rise of robo-advice could mean that advisers up their game.

“It’ll certainly separate the wheat from the chaff. If investors see they can get comparable, if not better, returns using an automated adviser at a fraction of the cost, they’ll be moving their money elsewhere,” he says.

Bamford believes that face-to-face advice will always be valued by those who require highly personalised advice from a trusted source, or simply prefer a human touch. Furthermore, robo-advice is not at the stage where it can replace the skills of an adviser, “although we should never say never when it comes to technological developments, or consumer willingness to embrace new technology,” Bamford notes.

Robo-advice is not without risk to consumers.

“Robo-advice can only be personalised to a limited extent, so anyone with large amounts of wealth or complex financial planning requirements would be better served by a professional adviser,” says Robertson.

“There is real value in the behavioural aspects of what we do as advisers, which cannot currently be performed by a robot.”

Similarly, Bamford believes the way risk profiles are calculated is also a cause for concern.

Currently, robo-advisers ask investors a series of questions to gauge their appetite for risk. However, the questions are limited and unchanging – everyone is asked the same set of questions. This may mean that investors are pushed into investment plans that are too risky, or too safe.

Port responds that while risk calculators may currently be limited, they merely highlight the need for automation to be accompanied by human input at certain stages.

Despite such misgivings, and the potentially stark implications for advisers, it’s clear that robo-advice is here to stay. And it is not just the preserve of tech start-ups. Vanguard and Charles Schwab both introduced robo-divisions this year, for US clients. UK equivalents could soon follow.

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