A couple of weeks back I sat on a panel discussion on robo advice hosted by investment bank Liberum – fellow panellists included Adam French of Scaleable Capital and Paolo Savini Nicci of MoneyFarm.
Surrounded by a wide array of interested institutional investors we artfully tried to answer all the predictable questions about what might happen next for the robo advice space, namely the state of customer demand, and whether the platforms have a viable business model?
But three topics kept cropping up in the ensuing debate, all of them pointing towards what I think will be the next iteration of robo advice, call it Robo 2.0. The most immediate issue is the reporting of returns which is patchy and all a bit haphazard. Many platforms hide behind the mantra that every portfolio is different but this strikes me as a lame excuse. How on earth can we expect investors to pick a long-term investment vehicle if they don’t have some idea about how your returns have evolved over time? Clearly the fact that many platforms are under one-year old and thus not allowed to report numbers does not help but what worries me is that there is no independent data vendor tracking returns from across all the platforms.
This data is needed because of the next issue – differentiation between providers. My colleague Moriah Costa on AltFi has been quietly building a spreadsheet of all the major pure play investment platforms (some of which are business to business, not to consumers) and by her reckoning – and allowing for a few failures already – she is already at 27 competitors in the UK and 40 in continental Europe. One small side note about these numbers – one major ETF issuer active in this space reckoned that there were actually over 70 robo platforms on the continent alone!
Whatever the exact number, I can safely predict that there are already too many players. And worse, far too many competing using the same mantra of “keep it low cost” and “use ETFs”. Plus of course, the necessary “easy to use customer” UX comments. I applaud the coming digitisation of wealth management but I worry that there is only ever going to be one or two major scale players who will dominate if the battle over differentiation is going to be fought over lowest cost and best interface. And my guess is that said winners will not be an upstart but someone who will copy the Schwab model in the US and cannibalise their existing customer base to build a low-cost online competitor.
In this battle for differentiation, each of the platforms needs a USP. With some, it might be the quality of the UX, the customer experience, but I personally doubt whether this really will ever prove to be the killer feature (or app). Everyone will just copy the clever feature of the innovator, with the big players plant their brand on top of the other people’s clever ideas. Another bunch of players will focus on aggregating the whole financial and investment journey, offering insight and some advice. Again I wish these players luck with this model but my money would be on the thrusting digital banks to grab that aggregation piece – relegating the robos to a side role.
I cannot help but think though that the killer USP might be something related to that observation on transparency and reporting – RETURNS, and especially portfolio construction.
As someone who has long argued for what are called “lazy” portfolios full of ETFs built using strategic asset allocation ideas I cannot see investors putting too much value on the portfolio construction process using essentially static long term strategies i.e variations of the portfolio models that scale risk from 1 to 10, or shunt investors into growth, balanced and defensive strategic portfolios. At an absolute push, they might be willing to pay 20 to 25 basis points for this but I think that is the max.
I also think that the big ETF issuers will wise up and start launching multi ETF funds that do all the asset allocation heavy lifting and then charge just 5 to 10 basis points for the privilege. At that point, many robo platforms will be caught in a battle where they are charging 50 basis points or more fundamentally for the wrapper product and some technology alone. Good luck with that model!
My own vision for Robo 2.0 would be a platform that combines three essential USPs. The first is active strategic asset allocation i.e properly weighting and reweighting portfolios with thematic overlays dependent on the client. For me that is all about minimising downside risk and maximising upside opportunities using smart tactical ideas. It might even mean – heaven forbid – jumping out of ETFs as the core fund choice and maybe thinking about deploying actively managed investment trusts. Why should all robos be passive? What is so wrong with an Active Robo, that provides great tech, keeps costs as low as possible but also provides the best alpha managers?
Next up a robo platform will need to embed their technology into the core spending and investing behaviour of their clients – nudging behaviour and building a better picture of the client’s holistic investment needs.
Lastly, counter intuitively, I think platforms will have to invest in people. People to help offer better advice down the telephone. People to help generate investment editorial content to keep engaging with their clients. People to run clever algorithms that spot better asset allocation patterns.
The problem of course with this last approach is that people cost money. And most robo platforms will need to spend every last penny they have on marketing budgets to build brand recognition and trust.