It was a rough summer for robo-advisers.
In May the Financial Conduct Authority (FCA) criticised several firms for failing to collect enough information about their clients.
Then in August New Model Adviser® revealed how the FCA’s criticism had prompted the biggest robos, led by Aviva-backed Wealthify, to band together in a bid to lobby the FCA. They want the regulator to adopt a lighter touch; after all, who is going to invest if it takes more than five minutes?
Last week Moneyfarm posted a £14 million loss. While not disastrous (remember, it took Nucleus six years to enter the black but now the company’s share price is rising on AIM), Moneyfarm hinted there is a lot to be done before robo-advice becomes a mainstream success.
Things were even worse at UBS, which decided to pull its SmartWealth service from the UK entirely. It has sold the technology to San Francisco-based start-up SigFig. As our sister title Wealth Manager revealed, after conducting a review UBS decided the venture was no longer worth it. This was despite the company insisting it was ‘satisfied’ with the initial commercial progress of the venture.
Perhaps the problem was a starting minimum investment of £15,000 was a bit too high for a younger target market.
But before the demise of robo-advice is proclaimed, it is worth turning to a speech given by FNZ’s Singapore managing director Timothy Neville at a conference in June, handily covered by technology magazine Hubbis last month.
In an unusually candid presentation, Neville said robo-advice had yet to take off because firms have not tried to improve advice, only make it cheaper to reproduce existing processes. ‘This may create greater efficiency, but does not really improve the investment proposition or optimise the investment outcome for the end investor,’ Neville said.
This sounds similar to the FCA’s criticism of robo-advisers from May: namely that they are not doing enough to establish why what they are recommending is suitable and getting the best results for each individual client.
As shown in our ongoing ‘robo review’ series, in which members of the New Model Adviser® team have invested money in a range of offerings, online advice businesses offer very similar investment propositions. This is usually a range of exchange-traded funds with the occasional small bond holding or cash.
FNZ’s plan is to create something that can build more individualised portfolios. This would use a centralised investment proposition, as many advice firms do, which could pick from thousands of funds. ‘In practice you could have 100,000 customers on your wealth platform, coming through the robo-adviser, all with different investment portfolios that are optimised to each individual,’ Neville said.
There is something of a jump here. FNZ will need to obtain enough personal information from clients to make this type of recommendation. Given that robo-advisers want to lobby the FCA because they think clients will reject longer sign-up times, this poses a challenge.
But FNZ also has an advantage in that it is working with some of the biggest providers in the UK and around the world. Aviva, Standard Life and Zurich are all using its technology for their platform. In effect FNZ already has the opportunity to see examine investment data, so long as it is not breaking general data protection regulation rules, and understands how people invest.
Neville outlined how this is already happening: one project FNZ is working on worldwide is analysis that predicts when people leave a product or platform. This allows an investment company to step in when it thinks a client might be about to switch.
With reports suggesting it could soon list with some big financial backing, it would be hard to bet against FNZ taking a dominant stake in the market.