David Stevenson has no issue with the claim robo-advice is 'the next big thing' but he finds himself less certain about who will actually end up doing the disrupting
Robo-advice is something of a paradox. Despite all the fevered debate and discussion about this being the next big thing in investment, I have yet to run into anyone who invests in any of the blazing new start-ups.
Actually, I did meet one of those Millennials who said they would stick £5,000 into an account as a 'tester'. And then promptly withdraw it again to pay for their first mortgage.
Clearly, I do think robo-advice is the next big thing. I also admire any young business such as Nutmeg trying to build a financial advice firm that investors trust. I also think some form of automated investing is the answer to the yawning advice gap opening up for anyone with less than £50,000.
My qualms largely centre on who will end up doing the disrupting. The economic model of most robo-advice start-ups is challenged, to put it mildly, while I still believe that for the right progressive IFAs, a form of white-label solution could be a huge add-on service for less wealthy clients.
So, who will fill the gap with these next generation robo-products? Last week, I caught up with senior bods over at BlackRock iShares, who have their own hunches about what might happen.
As you can imagine, like all its ETF peers, BlackRock is hugely enthusiastic about the robo-advice concept. It argues coherently and passionately that it will be a genuine game-changer.
Like me, I suspect they think some of the first movers will be brokerage and other D2C platforms, who can simply switch business model in the space of a few months. Think IG Index meets HL.
But for senior BlackRock people such as Michael Gruener, co-head of iShares EMEA sales, the big high street banks are the real dark horses to watch.
I would be a rich man if I was paid £1 for each rumour I have heard about a gaggle of high street banks all 'readying' their robo-advice, ETF-based propositions. The usual candidates keep cropping up in this discussion, namely Barclays, Lloyds and HSBC.
From a marketer's perspective, the logic is simple. The big UK high street banks have always dabbled in simplified investment products, sometimes effectively.
They are talented at reducing inherent market complexity and volatility into catchy sales lines - although their track record with structured products sold to the general public does not fill me with enormous confidence, especially when it comes to that simplification exercise.
ETF-based products will also allow them to transform essentially pointless and unprofitable cash accounts into fee-paying, long-term products that can be upsold.
Most importantly, despite all the bluster by journalists and campaigners about banks being deeply mistrusted, they are the one set of institutions most people actually trust with £50,000 or even £250,000 of their hard-earned cash.
But as a public service minded contrarian, I can hazard a few warnings. Let me paint a scenario.
What happens if these robo-products are sold with a hint that with portfolio 5 or perhaps 4 - in a distribution between 1 and 10 on a risk scale - you get some 'defensive' qualities against turmoil in the stockmarkets?
There will be mention of how corporate bonds could be a lifesaver, for instance. And then we have another big sell-off, an eminently predictable super-correlation event and those defensive products are anything but.
Any number of vexatious no-win, no-fee lawyers will jump on the intolerable 'lack of advice' bandwagon and the bank's treasury department will be busy setting aside yet more money for clients.
And let us be honest here - the FCA is already growing concerned about these 'model' portfolio structures, rightly asking whether anyone really understands what goes on in the construction process.
Maybe the big high street banks will dodge the bullet and fill the advice gap? Hurrah. That at least would be one positive result. But this 'success' creates another paradox.
Might the rise of ETFs and their robo-advice peers unwittingly create here in the UK a system rather like that on the continent, where large banks end up owning the big distribution platforms for investment products.
Hardly a very disruptive outcome.
David Stevenson is the Adventurous Investor columnist for the Weekend FT and a regular columnist at MoneyWeek. Click here to listen to his new bi-weekly podcast on Vox Markets.
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