Four years ago, and continuing until very recently, robo advisory was all the rage. It was impossible to go to any wealth conference without at least one of the speakers expounding the virtues of the technology revolution and how it was going to disrupt ‘established wealth management’.
Viewing the industry today, I feel a little cheated… on the surface nothing seems to have changed! So, I decided to have a closer look under the surface.
Build it and they will come. But unfortunately for many robos, they did not. In those heady days, there seemed to be a misconception that new technology alone could disrupt an existing, mature industry. Few questioned whether there was a market for bespoke portfolio management, but with the promise of reduced initial investments and low management fees! No prospective customer would be able to resist sophisticated private banking / wealth management at mass retail prices.
One of the problems was actually in the technology. The only way to make the numbers stack up was high volumes and aggressive automation applied to every aspect. This extended to the use of artificial intelligence to automate the provision of investment advice, which gave the business model its identity, robo advisory. However, research now shows that approximately 60 percent of potential customers would reject advice created by an algorithm, and only 8 percent thought it would result in a better outcome.
Therefore, the very technology that was needed for automation was driving away the volume needed for sustainability. As one speaker with self-confessed mental health issues explained, ‘when I am up my attitude to risk is high, when I am low it is the opposite so how can an algorithm give me advice that is suited to me?’.
Another problem was the promise. Reduced initial investments, often as low as £1,200 per year, and low management fees, averaging about 0.4 percent were fantastic for marketing tag lines. The reality however, was that even when you did sign customers, they were likely to be loss making for 3 to 5 years due to the low revenue generated per account and the relative high cost of acquisition, onboarding and servicing. And the more you signed in order to achieve the volume needed for sustainability, the greater the losses would grow! Britain’s largest robo advisor has managed to attract over 75,000 customers, which you would think was volume enough, but has yet to turn a profit!
It is therefore unsurprising that many robo advisors have shut up shop. Even large multinational investment banks, who were also caught in the rush for market share of what was to be a new financial services market, have not been immune to the numbers and have closed their robo businesses.
All the technology and no customers… But the technology was good, often very good. There were beautifully designed web portals, onboarding processes which took minutes when the industry standard is still measured in days, and highly efficient straight through processes.
Some robos have recognised this and, unable to achieve sustainability by selling financial advice, are now trying to achieve it by selling their technology. Ironically, they are selling it to established wealth managers, who have ‘all the customers and no (or not as good) technology’.
And what of the rest, those robos which are still in business? A quick scan of their websites reveals that something is missing… there are now few references to ‘robo advisory’ or ‘artificial intelligence’, the badges that were worn with pride in the past. These have been replaced with an emphasis on fully managed, transparent, investment teams and talking to experts. The last two of these are presumably human!
Even parts of the ‘promise’ seem to have changed. Although the reduced initial investments are still a feature, many have increased their management fees, sometimes with costs of as much as 0.9 to 1 percent. This is approaching the bottom end of what wealth managers would typically charge. It appears that the disruptors have lost their identity and have morphed into the ‘existing wealth management’ industry, the very industry that they had hoped to disrupt.
So, nothing seems to have changed!
At the start of this piece I mentioned that “I feel a little cheated”. I work at Contemi, which provides automation and efficiency solutions to the established wealth management industry. We approached our biggest client four years ago and asked ‘should we develop something for robo-advice?’ and they replied no, ‘please focus on client engagement tools as we want to talk to our clients and provide advice but be efficient through technology behind this’ – so we did what they said and the results are fantastic.
Although the rise of the robos showcased technologies that many of our customers could benefit from, the demise of the robos has robbed the wealth landscape of variety, which even if flawed, made it a more interesting place to be. Wealth industry conferences will never be the same… Until the next robot craze