Why Robot | CFA UK

Monday 17 October 2016

In an increasingly complex investment market, advice has become ever more important. How much of a role can technology play in helping to meet this increased need for advice? Janine Menasakanian looks at some of the issues.

Low interest rates, longevity, the withdrawal of employers and the state from pension guarantees… investment management has rarely been more important than it is right now. Perhaps that is the reason why it is currently threatened with so much disruption, from the on-going effects of the Retail Distribution Review, to the arrival of more empowered customers with very different buying habits.

One those threats – or opportunities, depending on which side of the divide you are working on – comes from the development of web-based services, generically known as ‘robo-advice’. According to Citywire, some 39 firms asked the Financial Conduct Authority (FCA) for guidance on setting up automated advice services in the UK in the year to October 2015. A report commissioned by The Business Research Company puts the worldwide total of robo firms at 200.

Market size is considerable. Ignition House, the financial services company, estimates the potential value of the automated investment market to stand at $1.9 trillion. A recent report by Deloitte estimates that in the course of the last three quarters of 2014, US robo-advisers grew assets under management by 65%, from $11.5 billion to $19 billion.

There appear to be a number of reasons driving this proliferation. One is that robo-advisers are evidently capable of offering value, at least in some areas of the market. Leading providers in the US claim that they are able to add a net-net annualised return of 4% to 5%, on a typical US$100k portfolio, above what a retail investor would likely achieve for themselves. Components of additional value include a preference for low-cost, passive investing, tax-loss harvesting, automated rebalancing and improved investor behaviours.

A second driver is the familiar mix of technology and demographics. Younger people are long used to turning to the internet, preferably on a hand-held device, for most of their financial services, including banking, insurance, credit and mortgage applications and tax returns. In this demographic, it seems only natural that investment services should also be available online. The majority of prospects in this demographic have few, if any, long-standing relationships with existing providers. In the US, Wealthfront says that 60% of its clients are under 35 and 90% are under 50.

A third impetus to robo-advice is political. It arises from the financial need to shift responsibility for later-life income to individuals, containing what might otherwise be an impossible burden on the exchequer while hopefully avoiding the pauperisation of large swathes of an ageing population. It is an onerous and vastly important task, and puts into perspective the urgency with which the FCA and other regulators are pushing for innovation in what they describe more broadly as ‘fintech’.

As technology democratises investing, the complexity and cost of the products offered is also likely to change. For most people, most of the time, a simple mix of global equities and global bonds will likely be sufficient. By rights, filling out a straight-forward online questionnaire ought to be enough guidance to direct the majority of mainstream clients. By simplifying the offering, reducing costs and pushing access to mobile devices, that mainstream could potentially be much, much larger than it is at present.


Robo-advice, in our view, does not replace human or face-to-face advice. A wholly automated service may be appropriate for younger demographics with limited assets and little time. A hybrid model, using technology to enhance the productivity of human advisers can work with clients seeking lower costs. High net worth clients have both the need and the resource for tailored, personal advice.

Certain parts of the advice service, such as asset allocation, are relatively straightforward for a machine to perform, as long as you give it the right inputs in areas such as time horizon and risk appetite. But there are other areas like family tax planning, where it is currently difficult for a robo-adviser to do as good a job as a human. …Article continues in the Autumn 2016 issue of Professional Investor [login required].