When so-called “robo-advisers” first started to appear on the UK wealth management scene there were many that prophesised they would be a major disruptive force on the sector.
Putting to one side whether “robo-advice” is the correct term (most of these services do not provide what the FCA would recognise as “advice”), it quickly became a buzzword. Much of the focus on the digitalisation of the sector fell on just this one element and the impact these new firms would have on the traditional business models and the face-to-face service firms provide.
However, UK wealth managers seem to have decided that robo-advisers will not be as disruptive as it was first suggested. In the 2017 PAM Digital Survey, in association with WDX, 71.11 percent of respondents said they do not view robo-advice services as a direct competitor. Only 15.56 percent said they did while 13.33 percent did not know how much of a competitive threat robo-advisers are.
This may be because many of the robo-advisers that have launched in the UK are targeting the mass affluent and retail sectors. Instead of seeking wealthy clients with more complex needs, they are trying to encourage less wealthy individuals to embrace investments as a way of generating better returns than cash at a time when interest rates have been low for some years.
There are some robo-services that are targeting more traditional wealth management clients, while some traditional wealth management firms are launching, or are considering launching, their own robo-services. Many of the latter are seeking to gain some traction in the mass affluent sector and also gain clients earlier in their wealth creation journey.
The hope appears to be that when these individuals become wealthy investors seeking a full wealth management service in the future they will remain with the firm and migrate to their traditional offering.
Another reason may be that the new standalone robo-advice firms face a hurdle in terms of the cost of gaining clients and therefore becoming profitable and viable threat to the established firms.
Speaking at a conference at the start of 2017, Andrew Power, a partner at Deloitte, predicted that in the long term there will probably be less than five successful standalone robo-advice firms in the UK.
His analysis suggests that, on the basis of an average portfolio size of £35,000 and an average fee of 75 bps, a robo-adviser needs to gain £3 billion of assets under management (AUM) in order to break even.
One of the main reasons the breakeven point is so high is the cost of client acquisition. Established financial services brands already have a client-base that they could convert to robo-advice users as well as a market presence that will attract new clients.
The advantage that the new standalone firms have is they have more up-to-date technology and will be able to be “nimble” rather than hampered by legacy systems and cultures.
This could well lead to some of the current robo-advice start-ups being acquired by established brands as a quick way for them to add this service to their offering.
This, according to Mr Power, would reflect the US market, where digital wealth management is much more established. Here, in the third quarter of 2016, 18 percent of the market was in the hands of standalone robo-advice firms and 82 percent was in the hands of established financial services firms (Vanguard and Schwab) with a robo-advice service, he said.
Despite not viewing robo-advice services as a direct competitor, the UK wealth management sector still needs to respond to the rise of digital services and the changing way clients want to interact with them.
Respondents to the 2017 PAM Digital Survey predict that within the next five years human-only interaction will completely disappear. Currently 86.67 percent said clients want the majority of interactions to with a human with some digital interactions.
The options of ‘to only interact with a human’ and ‘a fully automated digital service’ both scored 2.22 percent each. ‘Having some human interaction but mainly prefer digital services’ was chosen by 8.89 percent.
Looking five years into the future there was a marked change. Over half, 57.78 percent, said digital will lead with only some human interaction. Human interaction with some digital interaction remains the main method for 37.78 percent, while 4.44 percent predict digital-only communications. No respondent expected human only interactions to be taken place in five years’ time.
So whilst robo-advice may not be viewed as the great threat and disruptor, digitalisation is still predicted to shake up how the sector operates.