And we only have to look around at things we use every day and now take for granted to see major disruption in places few of us would have expected, even a few years ago:
- Uber, the cashless taxi app causing much angst amongst incumbent taxi firms in 250 cities across 55 countries
- Spotify, the music service converting music fans from ‘free’ (read ‘illegal’) formats to a paid-for streaming format
- Dropbox, the file-sharing service that gives everyone their very own ‘cloud’!
Before them, of course, big tech companies such as Amazon and Netflix blazed the path, fundamentally changing our expectations of how we engage and interact with technology, what we expect from it…… and how we use it to manage pretty much every aspect of our lives.
UK Wealth disruptors?
And in the wealth space? An increasing number of column inches – and mentions at conferences - are being given to the Harvard and Silicon Valley upstarts driving the businesses whose ambition it is to drive investment opportunities to the masseswhile simultaneously giving a damn good kicking to an industry that for too long has put its own needs first and the customer very much – at best - a distant second.
These robo-advice businesses – which use sophisticated computer algorithms rather than highly-paid humans to manage their customers’ investments across geographies and asset classes – are attracting significant venture capital in the States, in the belief that they are the answer to investors’ prayers – a diversified portfolio providing better investment performance at a lower price than that charged by traditional investment managers, while also handling their tax liabilities…….and all done automatically 24/7.
"We want to put brokers like Merrill Lynch out of Business by dragging the old world of investment advice into the modern digital age," Bill Harris, co-founder and CEO, Personal Finance
Wealthfront, for instance, now has over £2 bn under management from a standing start just 4 years ago, attracting (typically) young employees from the likes of Google, Facebook, LinkedIn and Twitter to buy low-cost ETFs. The minimum account size is just $5,000, and the first $10,000 is managed for free. After that, it’s 0.25% per year.
These US wealth businesses are banking on the idea that an easy to use and understand, automated solution - a diversified collection of index funds (often Vanguard) that suit a client's risk tolerance and are then periodically rebalanced to make sure they remain that way - will appeal to those who are just starting out on their investment journey and who don't want to pay the higher fees that are charged for actively managed portfolios. And of course, accounts are accessible 24/7 from any computer, tablet or smartphone.
Other robo-investment models are also beginning to gain traction in the States – Motif Investing, for instance, takes a different investment approach, enabling investors to focus on themes such as cybersecurity, cloud computing or even 3-D printing, rather than the more traditional asset class approach.
Regardless of investment approach, it is the robo-advice model that is getting more attention in the States than any other – from start-ups believing there are rich pickings to be had from an industry that for too long has focused on feathering its own nest, to forward-thinking advisers who are looking to integrate the model into their businesses, and of course the incumbent businesses who recognize the threat of these new propositions and are now developing their own response, such as Charles Schwab, which has created a robo-advice white label proposition for advisers to use.
"We'd love to see a world where individuals aren't preyed on by sharks and parasites looking to enrich themselves by selling high-cost, inappropriate investments," Adam Nash, CEO, Wealthfront
But what about the UK? We’ve already got a plethora of advised and D2C platforms jostling for position and traction in an over-crowded marketplace……. and having to deal with a ‘nanny state’ regulatory regime that refuses to accept customers have a degree of responsibility too, when making investment decisions.
Platform model evolution
From talking to contacts throughout the retail banking, platform, asset management, L&P and fintech sector, we believe a number of models will evolve in the UK, for example:
- A direct model which targets prospective clients (perhaps via an affinity group or through a community of like-minded individuals) and encourages engagement and take up with a range of free services, such as portfolio aggregation and existing portfolio analysis, followed by a comparison in performance and charges vs a robo-advice portfolio matched to the client’s profile; and then ‘nudging’ the prospect towards a decision. Importantly this model recognises and deeply understands its target customers, for instance the differences in needs and attitudes between older GenX’ers and the younger millennial generation, where using and moving between multiple tech devices and apps is common-place across all aspects of their life.
- An adviser model which integrates low-cost simplified advice into its existing business for a segment of existing customers (or potential new prospects) who just cannot afford (or do not have sufficient assets to justify) the full advice model today, but who may benefit from inter-generational transfer of wealth at some point in the future; effectively a low cost ‘plug and play’ proposition
- An alternative adviser model where advisers create a separate brand for their outsourced, automated solution so that the robo-advice offering does not hurt their existing, more personalized offering, or negatively impact their advisory business fees
- A hybrid model which provides a more efficient and better experience for those clients who want to self-invest part of their portfolio without utilizing the services of an adviser (say, during the accumulation phase for one or more goals), until they reach a life-stage or event where they then recognize they do need advice, and can ‘single-click’ on the website which alerts an adviser they are now needed (for instance to deal with an inheritance, or to understand and optimise the options they have when deciding how to take their retirement income).
While these lower cost models will undoubtedly have their place, they are effectively lower cost versions of what we have already, where they all believe that they are the centre of their customer’s financial universe. They are not!
In part 2 of this article I’ll look at where the real opportunity is…….. and predict who the winners and losers will be in this crowded space, where creating a differentiated and compelling customer-centric proposition is key.