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FEATURE: Robo-Advisor Phenomenon Gathers Pace; Electronic Media Tycoon Is Unconvinced

Tom Burroughes

17 November 2014

Wherever you look there doesn’t seem to be a way of avoiding talk of the “robo-advisor”. Enter the term into Google and you get 436,000 hits. The idea of automated financial advice has reached the stage where even former New York mayor and media tycoon, Michael Bloomberg, has attacked it. (This is richly ironic, given how he made his billions as an innovative provider of news and information.) We have seen that Alibaba, the Asia e-commerce firm that recently set records in its New York IPO, is looking at getting in on the act.

A recent report by MyPrivateBanking Research, a Switzerland-based research firm examining trends in the sector, has warned that the conventional private banking models are under threat from these “robots”. (See here.) There is also the realisation in parts of the industry that the issue of the so-called “advice gap” – people left unable to afford financial advice due to regulatory cost pressures – is a pressing public policy issue, and technology could provide some kind of fix.

One point to consider is that the picture looks a bit different depending on which side of the Atlantic Ocean you are on and there are differences also in other regions such as Europe. At , the consultancy and research firm, it recently issued a 24-page report, Automating Advice: How Online Firms Are Disrupting the Market for Financial Advice. Largely focusing on the US, it looked, at how US registered investment advisors, or RIAs, are at risk of being disintermediated by these technology trends.

The report’s author, William Trout, told this publication that the phenomenon is not just seen in the US – the usual nation to lead in such tech advances. (It is the land of Silicon Valley, after all.) He said there is plenty of robo-vigour in the UK market also, citing examples of such tech-driven firms as Nutmeg, WealthHorizon and the magnificently-named Money on Toast. (On the continent, there is also the example of Swissquote ePrivate Banking, the Swiss-based outfit.)

He sees a bit of a difference, at present, in what is driving the robo-advisor trend in the UK and US. "The fundamental difference is that in the US, technology drives changes, in the UK it is more about regulation,” he said in a telephone call.

One unifying feature of markets in both countries is that the portfolio construction and management process has been commoditised because it so conducive to being automated; the disruptive nature of technology does not centre on product (i.e. the investment portfolio itself) but on the means of delivering it.

“Looking forward, I’d say most aspects of the broad investment management process are vulnerable to commoditisation, even what is today described as investment `strategy’. That’s to say, the question is increasingly not what aspects of investments delivery can be automated, but rather what aspects cannot,” Trout said.

An issue will be whether the robo-advisor trend will be sufficient to overcome the kind of cost pressures that are leading conventional private banks/wealth managers to shift away from serving the mass affluent market towards high net worth and ultra HNW clients. At a recent briefing for journalists by the UK's , your correspondent was left in no doubt that in Europe at least, and in the wider world, the sheer volume of regulation means that even the snazziest tech platform faces significant compliance challenges. With so much IT spending still being driven by regulation – Europe has the joys of MiFID 2 to consider soon, for example – it remains to be seen how much innovation there will be.

There are signs that the traditional firms are taking the robo-advisor issue seriously. For instance, Schroders, the UK-listed wealth manager, along with other firms has injected some capital into Nutmeg, one of the best-known of the robo-advisors. (Nutmeg was founded in 2012.) Industry figures tell WealthBriefing that this looks very much as if Schroders wants to use its involvement to monitor how well, or otherwise, Nutmeg does in challenging existing businesses and whether it can make a consistent profit.

As is always the case in the early stages, some of the newbies won’t survive, just as happened in the early stages of the dotcom boom. There are doubters. Last July, the data and news service Bloomberg shuttered BloombergBlack, its investment advisory service, to new and existing clients, although the firm hasn’t said it is completely shutting the door to such ventures in future. The firm’s eponymous owner, Michael Bloomberg, was reported saying recently: “I don’t believe in automation for client service. When a client calls, it is a unique opportunity for us to interface with you, find out how things are going, and sell you another product.”

Up to a point, he may be right, although even the process of suggesting a client buy another product is becoming a feature of technology – consider how channels such as Amazon recommend other products/services to a client after a purchase is made. As mentioned above, Alibaba, the Chinese e-commerce giant, has moved into the business of distributing wealth management products and services. It may also be that it is in Asia, and the faster growing parts of the world, where some of the most important innovation lies - after all, Japan has been a trailblazer in industrial robotics, and China is a big operator in this area today.