Some advice firms are beginning to believe robo-advisers may not offer a genuine competitive threat to their business models - but, wonders Marilyn Cole, are they certain they are looking in the right place?
Independent ‘robo' businesses are now launching in such numbers as to be almost considered a sector in their own right. In general, these firms have been referred to as ‘robo-advisers', although many are not very happy with the name as, among other things, they believe it could put off investors.
It could also be leading the rest of the market, including financial advisers, to misconstrue the competitive threat.
A recent debate involving three of the robo businesses and hosted by consultancy the Lang Cat saw firms such as Nutmeg, Scalable Capital and Wealthify putting the emphasis much more on their investment solutions - suggesting they were offering robo wealth management rather than robo-advice.
That should not be too surprising - of the three, only Nutmeg provides advice. It is not as if the other firms are trying to pass themselves off as anything else. Their websites are clear - usually in the frequently asked questions - that they are not advisers.
This may all sound like a matter of vocabulary but regulatory clarity aside, it could well be of great importance for advisers scanning the horizon for the robo threat. And they may well ask - if it is not robo-advice, then does it really threaten adviser models at all when they lead their offerings with the planning and advice element?
We think the answer is still ‘yes' - and that is not just our conclusion. It may simply be that advisers could come under attack in a different way. In our own recent Money Talks debate, Sheriar Bradbury managing director of Bradbury Hamilton suggested that the big robo threat might be to advisers running on a percentage of fees under management model. He suggested future investors could look for very cheap investment solutions - perhaps picking them up almost ‘off the shelf'.
Some of the independent robo firms would suggest what they offer is often much more bespoke. Whatever the specific nature of the threat, Bradbury did n't see it materialising for several years - although it is his contention that only complex fee charging advice is insulated from this threat.
At Space, we would bring a couple more issues into the discussion. The first is that the robo firms - if they have set their eyes on the wealth management market - may come under scrutiny because some of their language suggests they may be testing the idea of a personal recommendation under the new rules of advice.
In doing so, they will also effectively test just how far a consumer can be ‘guided' to an investment solution -whether it is bespoke or not. That is clearly a short-term hurdle for the sector.
Yet if that could prove to be an obstacle, the robos could receive a boost, depending on the final nature of the FCA's asset management review. For now, the regulator appears most concerned about active management fund firms, but it does mention various advised portfolios and solutions too as issues they will get around to later. The total cost of investing requirement is likely to impact advisers eventually.
Given the various robo offerings are often based on passive instruments, including ETFs, it could provide another marketing boost to digital firms - particularly as the behaviour of future cohorts of consumers is difficult to anticipate at this stage.
A sceptical eye
We know from our discussions with advisers that they are not complacent about the threat - though many have cast a sceptical eye over the business plans of their emerging robo-challengers.
It is still very possible, however, that a robo business could take a dramatic market share or that, collectively, the sector begins to win a reasonable percentage of assets in, say, 2019. Whether they do this alone or because they are bought and backed by a big fund manager, a platform or even a bank remains to be seen.
We will also have to wait and see whether the banks' embrace of robo goes the way of their other forays into advice. We know they have designs on the mass-affluent market for investors - but that is at least a two-decades-old ambition.
Advisers who have been busy wincing at the use of the second word in ‘robo-advice' may have missed the fact the real threat comes in terms of the investment offering and new ways of accessing it.
There are a host of challenging questions if that is the case - about suitability, about capacity for loss, about managing money through downturns and more. Yet these firms seem increasingly confident of their answers - even implying technology can get them closer to a client and their needs than an adviser.
The next few years in markets may put such arguments to the test. But it is important advisers look in the right place for the competitive threat.
Marilyn Cole is managing partner at Space
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