the robo revolution - ivey business school · 2016-08-11 · robo-advisors and their impacts are...
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The Robo RevoluTion Robo-ADviCe MARKeT CoMMenTARY AnD AnAlYSiS
The essential guide to robo advisors for new
entrants and established players in the global industry
Paul Resnik, Director FinaMetrica Research, Stuart erskine MA
november 2015
SeCTion 1 inTRoDuCTion AnD eXeCuTive SuMMARY1.1 Reader’s guide1.2 IntroductionbyPaulResnik1.3 Executivesummary
SeCTion 2 The RiSe oF Robo-ADviSoRS2.1 Insidearobo-advisor2.2 Challengesforrobo-advisors2.3 Thechallengeofacquiringcustomers2.4 Whyrobo-advisorsarechangingthefinancial
distributionlandscape2.5 Whatrobo-advisorsmeanforhumanadvisors
SeCTion 3 Robo-ADviSoR MARKeT AnAlYSiS3.1 Therobo-advisorboomintheUS3.2 USrobo-advisorcasestudies3.3 ThelaginUKandEurope
SeCTion 4 ASSeSSinG A Robo-ADviSoR4.1 Assessingarobo-advisor
SeCTion 5 The Robo RelevAnT ReGulAToRY lAnDSCAPe 5.1 AnalysisoftheFinancialOmbudsmanService
complaintsdata5.2 Analysisoftheroborelevantregulation5.3 AnalysisofroborelevantMiFIDIandII
SeCTion 6 biblioGRAPhY AnD ReSeARCh linKS6.1 Bibliographyandlinkstoresearchresources
SeCTion 7 AnAlYSiS oF inDuSTRY PARTiCiPAnTS7.1 Robo-advicemarketparticipantsanalyzedby
categoryandfeatures
ConTenTS 3
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SeCTion 1 inTRoDuCTion
AnDeXeCuTive SuMMARY
1.1 ReADeR’S GuiDeWho neeDS ThiS ReSeARCh?Peoplewhoneedandusethisresearcharein,orgettinginto,therobo-advicebusinessandneedareferenceandstrategyguidetohelpthembuild,buyorimplementanautomated-advicesystem.Theyare:
• Financialservicescompanieswhoseeautomatedadviceencroachingontheirtraditionalturfandneedtoformulatearesponse;
• Technologycompaniesandotheroutsiderstothefinancialservicesindustry,whoseerobo-advisorsasalow-barrier-to-entrylaunchingpadtothefinancialservicesmarketplace;
• Investmentmanagers,whowillinevitablyendupinrelationshipswithautomatedadviceplatforms;and
• Agentsofchangewhomaintainanexpertiseinthetechnologicaldriversoffinancialadvice.
QueSTionS AnSWeReDThisresearchandanalysiswillhelpyouunderstandrobo-advisorsandrecognizetheopportunityorthreattheyposetoyourbusiness.Weanswerthesecriticalquestions:
• Whatisarobo-advisor?
• Whatisdrivingrobo-advisorsinthemarketplace?
• Whatdogoodrobo-advisorslooklike?
• Whatdisruptionswillrobo-advisorsbringtothefinancialadvicebusinessmodel?
• Whowillmakemoneyfromrobo-advisors?
MARKeTS CoveReDWeanalyzetherobo-advisormarketsintheUS,UKandEurope.
beneFiTS FoR ReADeRS• Detailedreferencesofresearchintotheautomated-advicemarketplace;
• Explanationsofrobo-advisors;
• Acategorizedtableofrobo-adviceindustryplayers;
• Analysisofchallengesforrobo-advisors;
• Strategicanalysisofarobo-advisor’simpactonthefinancialadvicemarket;and
• Aframeworkforassessingarobo-advisorforthesuitabilityofadvice.
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1.2 inTRoDuCTionRobo-advisorsareaseismiceventinfinancialservicesdistribution.Justlikeanearthquake,theirshockwaveswilltravelgreatdistancesandchangemanylandscapesbeyondrecognition.
Ibelievethatrobo-advisorsarethemostsignificantdevelopmentinthedeliveryoffinancialadviceinthepastthreedecades.Notbecausetheywillruletheworld,becausetheywon’t.Buttheywillchangeitinsomany,oftensubtle,waysthatitwillsoonbehardtoimaginethewaytheworldwasbeforetheyexisted–justastheinternetdidtwodecadesago.
Thenumberofpeopleworkingonbuilding,buyingorimplementingarobo-advicesolutionisgrowingbythedayandwillcontinuetogrowasthecompetitivethreatposedbyrobo-advisorsincreases.
Anumberofthemcomeknockingonmydoorasmycompany,FinaMetrica,suppliesacriticalsectionofthe‘brain’that
arobo-advisorneedstooperate.Withoutascientificallyaccuraterisk-toleranceprocess,liketheonewesupply,robo-advisorsareatriskofrecommendinginvestmentsthatarenotsuitablefortheirclients.Thatexposestherobooperatortotheriskofexpensivelegalactionorintervention,sanctionfromregulatorsandreputationdamage.
FinaMetricaexpectsagrowingdemandforqualitysuitabilityprocessesfromroboadvisors.Norobocanaffordthelossofconfidencethataccompanieslegalclaimsfromdissatisfiedclients.WiththisunderstandingFinaMetricahasdevelopedasuitabilityplug-inInvestorProfilerforexistingandaspiringrobostoenablethemtoprovidethebest-possiblesolutions.
AdvisorsrelyonFinaMetrica’saward-winningriskprofilingprocesstohelpclientsstayinvestedandachievetheirfinancialgoalsbydeliveringsuitableinvestmentadvice.Launchedin1998andproventhroughmarketcycles,FinaMetricaisusedbythousandsofleadingadvisorsaroundtheglobetoscientificallyassesstheirclients’risktolerance,incorporatethoseassessmentsintothefinancialplanningprocessandframeexpectationsmorerealistically.Over850,000FinaMetricariskprofileshavebeencompletedtodate.Weknowtheindustrywellandunderstandtherapidchanges.
Repeatedly,weobservedthatpeopleworkingon,orwith,robo-advisorswereoperatinginavacuum.Theyoftenstruggledtofindinformationabouthowtherobospacearoundthemwasevolving.Theirworldwasendingattheedgesoftheirwhiteboardsandtheywerecallingoutforsomeonetoprovideabroaderperspective.
Thisguideisouranswertothosecalls.Ithasdetailedanalysisandreferenceresourcestoallowyoutomakeaninformed,considered,strategicresponsetotheriseoftherobo-advisor.
Weapplygreaterintellectualrigourtothestrategicdiscussionaboutrobo-advisors.Wegofarbeyondthe‘Terminator’question,whichasks‘willthisbetheriseofthemachinesandtheendofthehumans?’(Inthiscase,thehumanadvisor)because,strategically,thisisasecondaryissue.Undoubtedly,somehumanroleswillbereplacedbyautomation,butthatishappeninginallindustriesallthetime.
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Themoreimportantstrategicquestionsrevolvearoundthestrategicopportunitiesandthreatsthatrobo-advisorsposeforestablishedfinancialservicesplayers,newentrantsanddisrupters.Nooneknowswhererobo-advisorswillleadus,whichiswhatmakesthemsosimultaneouslyexcitingand threatening.
ButofonethingIamcertain–robo-advisorsarelikelytobeasgreatadisruptertothedeliveryoffinancialadviceasUberistopublictransport.Itcouldbeanexpensivemistaketomakeanuninformeddecisiontooperatearobo-advisorortochoosetodisregardordismissthem.
Robo-advisorsaredefinitelytheflavourofthemonth.Withatinymarketshareoflessthan1%ofassetsundermanagement(AUM)theyregularlymakeheadlinesinthefinancialpressandmanydifferentbusinessesarespendingupbigtoquicklygetintothegame.
Thisreportwillhelpyouunderstandwhyandworkouthowyourbusinesscangrab,orprotect,ashareofthemarket.
Paul Resnik
Author,November2015
ReSeARChStuart Erskine MA | Research
StuartErskinehasanacademicbackgroundinbehavioraleconomics,heunderstandshumanbehaviorandhasbeeninvolvedinthedevelopmentoftechnologytoenhanceandimproveonlinetechnologytoimproveconsumeroutcomes,particularlyinthefinancialservicessector.Stuarthasbeenworkingrecentlywithateamofleadingacademicsintheareaofonlinerisksystems.Hehasabreadthofexperiencehavingworkedinseniorrolesinfinancialservicesdistribution,manufacturerandoutsourcingsectors,particularlyinthespaceoftechnology.Hehasatrackrecordofsuccessfullyhelpingorganizationsselectanddeveloptheirtechnologyandimplementinnovativestrategies.Stuarthasawiderangeofclientsinvolvedinrobostrategy,includingstart-upsandestablishedplayers.
FinAMeTRiCA ConTACTSTyler D. Nunnally|USStrategist
Office+14043206047|Mobile+14044922152
2213VistamontDrive,Decatur,GA30033USA
Roderic Rennison|MarketingConsultant
Tel:+447977277416
Paul Resnik|DirectorFinaMetrica
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1.3 eXeCuTive SuMMARY ‘Howarewetoassessarobo-advisor?’isatop-of-mindquestionforanyoneconsideringbuilding,buyingorimplementingarobo-advisorprocessalongwithotherquestionssuchas:
• Howdoweensurethisdoesn’tgetussued?
• Howdowecomplywithvariousrulestoensureregulatorsdon’tsanctionus?
• Whatframeworkorguidelinescanwepointtoinordertodemonstratethatourrobogivessuitableadvice?
• Isthisgoingtobeacommercialsuccess?
Wehaveconstructedanintelligentframeworkthatwillallowrobo-advisoryprocessestobeassessedfor:
• Businessrisk;
• Regulatoryrisk;
• Investmentsuitabilityrisk;and
• Commercialsuccess.
Wefindsuitabilitytobeaveryusefuloverridingtermforestablishinganassessmentframework,asitcapturesthetwocriticalquestions:
1. Haveyoumadesuitableinquiriesofyourclienttoknowenoughaboutthemtobeabletomakearecommendationrelevanttotheircircumstances?
2.Istherecommendationyoumakesuitabletothem?Thestandardproxyforsuitabilityincludestheperson’srisktolerance.
Tohelprobosovercomesuitabilitychallenges,FinaMetricahasdevelopedasuitabilitysolution,itsInvestorProfiler,aimedatexistingandaspiringrobostoenablethemtoprovidethebest-possiblesolutions.
Oursuitabilitysolutionisbuiltona:
• Marketproven12-or25-questionpsychometricrisktolerancetest.
• Marketproveninvestorprofilingmethodology,whichbringstogetherrisktolerancewithanalysingclients’capacityforlossandtimehorizonissues.
• MarketprovenabilitytoframeinvestmentexpectationsthroughourRiskandReturnGuide.
Thescientificrisktolerancetestandajointlycreatedsetofquestionsandscoringtakesintoaccountinvestors’timehorizons,capacityforloss,risktolerance,knowledgeofinvestmentsandinvestmentexperience.Thishelpsrobosmeetthecommercialimperativeandregulatoryrequirementtodeliveradvicethatsuitsinvestors’needs.
Robo-advisorsarechangingthefinancialadvicelandscape.Thisisnotadistantfuturepossibility;itistoday’sreality.
Robo-advisorsthemselvesareveryimpressiveintheirabilitytodo‘process’workintherelativeblinkofaneye,toaconsistentstandardandatalowcost.Theirscalabilitymakesthembothanopportunityandathreattothoseinvolvedinfinancialservicesdistributionandmanufacture.
Initially,atleast,automatedadvicesystemsfacesixbroadandsignificantchallengestoovercome:
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1. Changingperceptionsoffinancialadvice;
2. Establishingtrust;
3. Meetingadviceandguidancegaps;
4. Economicinfluences;
5. Costofacquiringclients;and
6. Behaviouralbiases.
Thecostofacquiringclientsisacrucialissueforrobo-advisors,justasitisfortherestofthefinancialadviceindustry.Withoutcustomersorinvestors,arobo-advisorismerelylinesof
computercodegatheringdustonaserver.
Marketingyourroboservicetocustomerscanbeveryexpensive.Yetthispointisseldomraisedduringdiscussionsaboutrobo-advisors.
Intheirquesttofindclients,weseerobo-advisorsasbeingasdisruptivetothefinancialservicessectorasUberistopublictransport.Robo-advisorswillallowandhelpworld-changingthingstohappen.Robo-advicesystemsallowmanyotherthingstobebuiltonthefoundationstheycreate.
Currently,robo-advisorsarelimitedinfunctionandscope–westillneedpeoplewhenthingsgetcomplexor‘outsidethealgorithm’.Butthisischangingasrobo-advisorsbecomemoresophisticated.Weseeinthenearfuturetheemergenceofarangeofroboprocessesthatwilltargetspecificareasoffinancialcomplexity.
Americaistheepicenteroftherobo-advisorboom.Anyseriousdiscussionsaboutrobo-advisorsandtheirimpactsarerootedintheUSexperience.TheUShasthetechnologicalsavvytodeveloprobo-advisorsandthelighter-touchregulatorysettingstoallowthemtoflourish.
Robo-advisorsarenotasyetflourishingintheUK;inpartstrictregulationstheremaymakethemsuitableonlyforlimited,lesscomplexadvice.Europeasaregionismoreencouraging,butisaslow-growthregioncomparedtotheUS.
Therobo-adviceindustryischaracterizedbyextensiveactivityamongtheexistinglargeplayers,withexistingclientbasesinfinancialservicesandtheemergenceofwell-fundedstart-uprobo-advisorbusinessessuchasBettermentandWealthfrontwhicharemarketingheavilytowinnewclients.
Weforeseethatoneofthegreatestthreatstoexistingfinancialservicesbusinessesfromrobo-advisorswillbetheeasewithwhichtheyallownewentrantstorapidlyenterthemarketusingwhite-labelroboproducts.
Robo-advisorsbridgethetraditionalmoatsaroundadvicebusinessesandallowanewentranttocrashintothemarket.Brandedrobo-advisorscanbequickandeconomicaltodeployifyoucansupplythecustomers–forexample,throughachurchcommunity,usergrouporevenasportingclub.Arobo-advisormayletyouleadyourcommunityoffthetraditionalfinancialservicesgrid,awayfromestablishedindustryplayers.
We foresee that one of the greatest threats to existing financial services businesses from robo-advisors will be the ease with which they allow new entrants to rapidly enter the market using white-label robo products.
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SeCTion 2 The RiSe
oFRobo-ADviSoRS
2.1 inSiDe A Robo-ADviSoR
Robo-advisorsatthemostbasiclevelsimplyautomatethefinancialadviceprocessincluding:
1. Collectingdataaboutaclient’sidentity,theirfinancialsituation,thegoalsand–importantly–theirrisktolerance;
2. Usinganalgorithmcontainingrisktolerance,financialdataandgoalstoproduceaninvestmentrecommendationthatissuitablefortheclient;and
3. Implementingtherecommendationbymanagingthepurchaseandongoingoperationsoftheinvestments.
Robo-advisorsdon’tdoanythingnewthathumansarenotdoingalready.Butrobo-advisorsdotheworkintheblinkofaneye,toaconsistentstandardandatlowcostandtheirprocessesareeasilyscalable.
WhAT Robo-ADviSoR MeAnSTheterm‘robo-advisor’emergedin2002,whenRichardJ.KoretocoineditasthetitleofhisarticleinFinancialPlanningmagazine.Inmorerecentyearsithasbeenwidelyadoptedasthestandardtermtodescribefinancialadviceprocessesthatare:
• Automatedwithlittle,orno,humaninterventions;
• Deliveredonline;
• Self-service;
• Usealgorithmstomatchportfoliostoclients,basedonassessedrisktoleranceandotherfactorssuchasage;and
• Confinedtorelativelysimpleportfolioconstructionmatters,includingallocatinginvestmentstoassetsclasses,rebalancing,taxoptimizationandaccountaggregation.
Processesthatinvolvetheuseoftechnologyinsupportofahumaninteraction–forexample,anadvisorusinganautomateddata-gatheringquestionnairewithclients–arenotroboinnature.Thesehybridhuman/technologysystemsarebetterdescribedascyborg(halfhuman,halfmachine).Robo-advisorswillcertainlyplayanimportantpartinthecyborgworld,butthebiggerstoryiswhattheycanachieveontheirown.
Dependingonyourdefinition,itcaneasilybearguedthatrobo-advisorshavebeenwithusforaroundadecade.Nonetheless,wegenerallyconsiderthisarelativelynewgrowtharea,witharoundhalfofallrobo-advisorscomingintoexistenceinthelasttwoyears.
WhAT Robo-ADviSoRS DoRobo-advisorsaregoodatproducingtheprocess-driveninvestmentrecommendationandimplementationthatwedescribed.Robo-advisorsexcelinsituationsthataresimple,wherethevariablesarecommonenoughtobefactoredintoanalgorithm.
Atthisstage,robo-advisorsdonot,generally,strayintomorecomplexscenariosinvolvingcomplicatedfinancialadvice–forexample,cash-flowmanagementorretirementincomeplanning.Suchmattersarestillthedomainofface-to-facefinancialplanningbecause:
• Thevariablestobeconsideredaresowide,complexandrandomthattheydefybeingeasilycodedintoalgorithmsthatproducemeaningfulresults;and
Robo-advisors don’t do anything new that humans are not doing already. but robo-advisors do the work in the blink of an eye, to a consistent standard and at low cost and their processes are easily scalable.
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• Inthesemorecomplexscenariospeopleappeartovaluehumaninteractionwhichallowsfor‘live’explanationofconceptswithspecificanswerstospecificquestionsabouttheirownuniquecircumstance.
However,robo-advisorsarerapidlycatchingup.Somecanalreadyhandlerelativelycomplex,buthighlyfocused,situations–theyare,essentially,specializinginoneaspectofcomplexity.Wecannotassumethatrobo-advisorswillremain‘dumb’–wemustanticipatethatrobo-advisorswillbecomeincreasinglymoresophisticatedintheirabilitiesandscope.
Weseethedevelopmentofmanydifferentrobo-advicesystemswheredifferentrobo-advisorshavealgorithmsskewedtowardstheissuesofaparticularbroadgrouping.Forexample,theremaybearobo-advisorforyoung,high-earners,anotherforretireesandoneforblendedfamilieswherecomplexestateplanningneedsmightrequiredifferentparametersinthealgorithm.
Werecognizetheexistence,andongoingprosperityofsomeboutiquerobo-advisorsthatonlydosteps1and2intheprocessdescribedabove–theyare,essentially,sellingthewisdomoftheiralgorithm’sassetallocatorforafee.Theclientmaythenimplementtheirownsolutionhowtheyseefit.
Buttheserobo-advisorsareoperatingatthefringe.Themaingameinrobo-advisorsisbuildingfundsundermanagement(FUM).
WhAT DRiveS RoboSThe‘brains’(decision-makinglogic)thatmakearobo-advisorworkwillbefamiliartomostpeopleinfinancialservices.Sometimesrobosarebuiltfromscratch,butmanyofthemodulesinsidearobo-advisorarebolt-onsormodificationsofexistingfinancialsoftwareandinvolvethere-purposingofwidelyusedportfoliomanagementandriskprofilingsoftwarethathasbeeninthemarketplaceformanyyears.Themaindifferenceisthattheuserinterface(UI)anduserexperience(UX)forrobo-advicehasbeenspecificallycreatedforself-serviceusebyretailinvestors.
FinaMetricaoperatesintherobospace.Wesupplyrobo-advisorswithaveryimportantpieceofthe‘brain’theyneedtoproperlyassessrisktolerancesotherobo-advisorcanrecommendsuitableinvestmentstotheirclients.FinaMetricahasmovedtowardsintegratingsoftwareandprovidingoff-the-shelfrobosolutionsfornewentrantsandestablishedplayers.
ClASSiFYinG Robo-ADviSoRSRobo-advisorsallsharecommoncharacteristics.Attheirheart(if,indeed,arobo-advisorcanbesaidtohaveone?)arealgorithmswithmanycomponentsthatcandifferinmanysubtle,orevenextreme,ways.Robo-advisorsdodifferentthingswell,classifyingthemcanaidunderstandingofthemarketplaceandtheoptionsavailable.
Themostusefulwaytoapproachthisclassificationistoanalyze:
1. Theextentofservicestherobo-advisorprovides;and
2. Howtheadviceisdelivered.
Wehaveutilizedtheclassificationofrobo-advisorsdevelopedinthe‘AutomatedInvestmentAdvisors’paperwrittenbyKymSheehan&Associates.Itanalyzesthefunctionsprovidedandcategorizestheirofferingintoaspectrumrangingfromsimple‘budgeting’servicesthroughto amorevaluable‘adviceoffering’and‘investmentallocation’proposition:
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Category Services Provided
Budgeting tool Simple online cash-flow modeling or budgeting assistance
Financial Planning Education Educational information and guidance on general financial planning matters
Retirement planning & investment wrapper Pension and other investment wrappers which may include ISA, SIPP & bonds
Social media / investment community This may range from sharing of ideas to creation of model portfolios that can be shared
Robo-advisor Usually online series of questions including attitude to risk leading to an advised investment portfolio
White-label capacity Ability for the proposition to be branded and utilized by a third party.
ThedevelopmentpathinthetwocasestudiescontainedwithinthispaperofthelargestUSrobo-advisorsshowsthatmorechallengingadviceareasarebeginningtobeaddressed,albeitslowlyandwithcaution.
FinaMetricasuggeststhateventhemoresophisticatedrobo-advisormodelswillinthenearfuture,bemostly‘lowpersonalization,lowintimacy’customerpropositions.
Theanalysisofthesignificantplayersintherobo-advisorworldiscontainedinSection7–AnalysisofIndustryParticipants.
SuSTAinAble SeRviCe PRoPoSiTionS & vAlue
Intimacy:
Collaborative suitability
Personal engagement
Plan relevance to clients needs
Level of personalization of portfolio
Premium Pricing
Legal:
Tax, Insurance, Estate, Pension Planning
h
h
ll
l hCommodity
Pricing
Commodity Impersonal
Advice & Complex Portfolios
Need/Capacity
v attitude to risk & Model
Portfolios
Life Planning & Model Portfolios
Life Planning
& Personal Portfolios
Life Planning & Highly
Personalised Portfolios
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2.2 ChAllenGeS FoR Robo-ADviSoRS
Webelievethatrobo-advisorsareparadigmchanging,butthatdoesn’tmeantheyhaveafreepassto success.
Wearguethatrobo-advisorsmustovercomesixsignificantchallengesiftheyaretoevolveintoprofitablefinancialservicesbusinesses:
1. Changingperceptionsoffinancialadvice;
2. Establishingtrust;
3. Meetadviceandguidancegaps;
4. Economicinfluences;
5. Costofacquiringclients;and
6. Managebehavioralbiases.
1. Changing perceptions of financial adviceForaverylargegroupofconsumers,investmentadvisorsareself-interestedandgreedy,financialmarketsareriggedandcorruptandtheirmoneyisbetteroffbeingself-investedintorealestate,goldandotherrealassets.
Thiswidelyheldperceptionofthefinanceindustryisjustlydeserved.
Therehavebeenfartoomanyfinancialservicesscandalsthatprovethesetheories,fromanoutrightfraudlikeBernieMadoffthroughtoalocaladvisorchurninganunsophisticatedclientthroughaprocessionofhighbrokerage-feeproducts.Meanwhile,theglobalmarketscollapseof2008hasleftmanyinvestorswaryanduntrustingoftheentirefinancialmarketframework–theywouldratherbuyrealestatethattheycanseeandtouch.
Thefinancialadviceindustryhasfailedtomakeaconvincingargumenttojustifyitsvaluetoconsumers.Theindustryhasstruggledwiththeintangibilityofadvice,thepotentialuncertaintiesofoutcomesshouldmarketscrashandperceptionsofgreedandcorruptionamongthepeoplerunningthe‘system’.Theimpactofthisisthatmostpeopledon’twanttopayforfinancialadvice.
TheresultsoftheA.T.Kearney2015RoboAdvisoryServicesstudyintheUKshouldconcerneveryoneinthefinancialadviceindustry:
• Just14%ofadultsconsideredthemselves‘likely’topayforfinancialadvice,while53%ofpeoplesaidtheywere‘unlikely’topayforadvice;
• Manywouldbeunwillingtopayforanyservicesthattheyhadpreviouslyenjoyedfor‘free’;
• Mostwouldnotpaythehourlyratesforadvicethatadvisorswoulddemand;58%ofpeoplesaidadvicewasworthlessthan£50(US$78)perhour,whiletheaverageadvisorintheUKisexpectingtobepaid£165(US$257)perhour;
• Thelowperceivedvalueofadvicecomesasonly79%ofpeoplesaytheydonothaveagoodunderstandingofsavingsandinvestmentproducts;and
• Despitetheself-acknowledgedignoranceofinvestmentproducts,theabilityto‘self-service’investmentadviceisratedhighly,with37%ofrespondentssayingtheywouldusea‘jargon-free’websiteforfinancialguidance.
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The‘self-service’findingdeservestobetreatedwithgreatcaution.Surveyrespondentsmightbetryingtobeseentowanttodotherightthinginthesamewaytheywouldsay,ifaskedbyastranger,thattheyintendtoeatfruitandundertakeregularexercise.Theymay,indeed,holdthoseintents–butconvertingthemtoactionsisanothermatterentirely.
Wehaveacaseinpoint.Inresponsetofindingslikethese,theUKgovernmentlaunchedtheMoneyAdviceService(MAS)thatprovidesfreeonlinefinancialeducationandguidanceonlineandoverthephone.Whileitisjargon-free,onlineandofferedfree,theservicehasnotdrawnthelevelofresponsefirstthought.Manypeoplearenotactivelyengagedwiththeirfinancialplanningormakingself-directedinvestmentdecisions.Theexperienceofthefinancialservicesindustrysupportsthis–theindustryhasalwayshadtopursuecustomersandcajolethem(oftenthroughfear)toact.
Sowhy,then,wouldanyonechangejustbecausesomeonebuiltarobo-advisor?Whatwouldbesoengagingthatpeoplewouldseekoneout?Whywouldtheysuddenlybehappytopayaroboforfinancialadvicewhentheywillnotpayahuman?
Wecanfindnologicalreasontobelievethatcustomersaremorelikelytoactivelyengagewithinvestmentsandpayafeeforfinancialadvicejustbecauseawebsiteorsmartphoneappisdeliveringtheadvice.
Inthisrespect,webelievearobo-advisorfacesallofthesamechallengeaseveryoneelseintheadvicebusiness,withoneadditionalburden–itmustovercomeits‘inhumanity’andestablishtrust.
2. establishing trustInfinancialplanning,humaninteractionhastraditionallybeenvitallyimportant.Asmanyasalespersonknows,sellingsomethingthatisintangiblerequirestheestablishmentoftrust.Thisisproblematic,becausetrustintheplanningindustryislow.
Trustisdefinedas“apsychologicalstatecomprisingtheintentiontoacceptvulnerabilitybaseduponpositiveexpectationsoftheintentionsorbehaviorsofanother”(Rousseau,Sitkin,Burt,&Camerer,1998).
Repeatedsurveysaroundtheworldshowfinancialadvisorssittowardsthebottomofthetrustladder.AccordingtoGallup,only11%ofAmericansthinkstockbrokershavehighethicalstandards,comparedto15%forinsurancesalespeopleand8%forcarsalespeople.(Wanttobetrusted?Beanurse–theyareconsistentlynumber1onthelist,wherefourofthetopfivemosttrustedjobswearwhiteuniformstowork!).
Thequestionishowdorobo-advisorsshowtheyaretrustworthy?
Toshowyouaretrustworthy,youmustdisplaythebehavioursthatwillleadtopeopletotrustyou.Threeimportantrequirementsare:
1. Becompetentinthemattersinwhichyouclaimcompetence;
2. Bereliable,bydoingthethingsthatareexpectedofyouandthethingsthatyouhavepromisedtodo;and
3. Behonestandtransparentinyourdealingswithcustomers.
Amazonistrustedbecauseitdoesallthesethings–andmore.Amazon’s‘noquestionsasked’refundpolicyencouragespeopletotrustit,bymakingitselfvulnerabletothecustomer.Vulnerabilityisasignaloftrustworthinessandconfidenceinyouroffer.PerhapsanexampleofattemptingtodeveloptrustintheroboworldisWealthfront,whichoffersitsserviceandplatformfreeofchargeforthefirst$20,000.Bydoingthisitissignalingaformofcommercialvulnerabilitythathascontributedinhigheraverageaccountsizesandfees.
Toconvincethebroadpublicthatitcanbetrusted,arobo-advisorwillberequiredtomakethesameinvestmentinprocessesandmarketingtotellthestoryofhowandwhytheyaretrustworthyasanyotheradvisorybusiness.
Trust is defined as “a psychological state comprising the intention to accept vulnerability based upon positive expectations of the intentions or behaviours of another” (Rousseau, Sitkin, burt, & Camerer, 1998).
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Thisrequirementfavorsestablishedbrandsandthelargeendoftowninthecurrentfinancialservicessector,astheyalreadyhavecustomerbasesintowhichtomarkettoquicklyachievescalewhilealsohavingthemarketingbudgetsandcommunicationchannelsneededtoattractnewbusinesstoarobo-advisor.
3. Advice and guidance gaps‘Advicegaps’arisewhenpeoplewhocouldbenefitfromfinancialadvicedonotreceiveitbecause:
• Theirlevelofassetsistoolowtoviablywarranttheattentionofafinancialadvisor;or
• Theyarenotpreparedtopayafeetoreceiveadvice.
Thequestionofwhatconstitutesarequisitelevelofassetsisaninterestingone.Theanswervariesacrossjurisdictions.
IntheUS,thedesiretomaximizeplannerprofitsappearstobewhythefinancialbarrierstoaccessingafinancialplannerareveryhighcomparedwiththerestoftheworld.USadvisorsfocusalmostexclusivelyonwhatwouldberegardedashighwealthclientsintherestoftheworld.
IntheUK,financialadviceisgenerallymorereadilyavailabletothemiddleclasses–whatmightbetermedthe‘massaffluent’.
IntheUK,thedollarfigurerequiredtoaccessabasicserviceisdrivensignificantlybytheregulatoryframework.Ironically,rulesthatwereintroducedtoprotectconsumersnowdenymanyofthosepeopleanyserviceatallasthecostsofregulatorycompliancearetoohightomakethemfinanciallyviableasfinancialplanningclients.
Itis,perhaps,alogicalconclusiontoseerobo-advisorsasthesolutiontotheadvicegapastheyhavescalabilityandcanservicecustomersatlowcost.Somepeopleseerobo-advisors‘democratizing’financialadvice,makingitavailabletoall.
Thecostofacquiringaclientforarobo-advisorcanbeashighasthatforacquiringaclientforahumanadvisor.Aswewilldiscussinthenextchapter,theacquisitioncostsarelikelytobethedominantcomponentofoperatingarobo-advisor–oftenfarmoresignificantthanthecostsavingsdeliveredbytherobo.
Bydefinition,thoseinadvicegapshavelowerinvestableassetbalances,whichmeans,percustomer,lowerincomefortherobooperator.Robo-advisorsneedprofitableclients–buttoacquirethemasclientstheyneedtoinvestseriousmarketingmoney,whichiswhyexistingbigplayershaveadvantagesovernewentrantstart-upsnomatterhowwellfunded.TheexceptionisperhapsthoseprovidingaB2Brobowhite-labelplatformforexistingdistributors.
4. economic influencesAroundtheworld,wealthisbeingsqueezedintouppereconomicgroups,withcorrespondingfallsinincomeandwealthforthemiddleandlowereconomicgroups.
Thelossofthemiddlerangeinvestormeansthatanincreasingnumberofserviceprovidersaremarketingtoashrinkingpoolofaffluentinvestors,albeitthateachofthosecustomerscomesbearingalargerpoolofassets.Robo-advisorsaddtothelistofcontendersforahigher-worthclient.
Atthesametime,theremightbeincreaseddemandforrobo-advisorsthatfocusonprovidingbudgetingtoolsandcash-flowforecasting,astheseissuesareofmoresignificancetolowereconomicgroupsthanquestionsofinvestment.
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5. Cost of acquiring clients (CAC)Robo-advisorsneedclientstooperateandthecostofacquiringclientsinfinancialservicesishigh.
Tous,thisistheelephantintherobo-advisorroomthatisseldomdiscussed–whichwebelieveisastrategicfailureofthehighestorder.Wedevotethefollowingchapterofthispapertothisissueasitisanoverridingconcernthathangsoverallotherdiscussionsaboutrobo-advisors.
Acquisitioncostsincludethecostsofinitiallyfindingaprospectandthenconvertingthoseprospectsintoclients,withtheinevitableattritionratethatthoseconversionsincur.Whentotalcostsarecomparedtoclientsgainedtheresultscanbesurprisinglyhigh.LucianCampcalculatesthecostofacquiringaclientintheUKtobearound£200(US$312).
Thiscostisbeyondthemeansofmanyadvisoryfirms,whichiswhytheygrowratherslowly–largelythroughword-of-mouthreferral.Inthepast,theymighthavereliedonproductmanufacturersanddistributorstoprovidethemwithmarketingsupport.UndernewregulationsintheUKsuchsupportsarenowlargelynolongerpossible.ButtheycontinuetothriveintheUSmarketplace.
Inaworldwhereformerspecialtieshavebecomecommoditized,beingabletomakeafinancialproductorservicenolongermakesyouspecialasitoncedid.
Where,inthepast,youmayhavebeenabletoextractaneconomicrentbecauseyouoccupiedapositionofadvantage,marketforceshavenowequalizedyou.
Today,theability(knowledge)andcapacity(cash-flow)toquicklymarketfinancialproductstoscaleiswhatseparatessuccessfulfinancialservicesbusinessesfromthe‘also-rans’.
Itdoesnotmatterifyouarriveatthemarketplacewithabettermousetrapifthattrapishiddenwherethemicecannotfindit.Cheese–intheformofmarketing,advertisingandpromotion–willhelptoattractthem.Butcheeseisn’tcheap.
Wereturn,onceagain,toourinitialcaution–robo-advisorsareverygood
atservicingcustomers,butdonothingtoattractcustomers.Puttingarobo-advisortoworkeffectivelyrequiresconsiderableinvestmentinmarketingandpromotions,withnoguaranteeofsuccess.
Vitaminsandsupplementsareequallygeneric.Yet,afamilybusinessinAustraliafiguredouthowtocreateabrandthatmadegenericinputs‘special’.Inlate2015,aChinesefirmacquiredthevitaminandsupplementcompany,Swisse,forA$1.5billion(US$1.05billion).
Swisseisamarketingmachine–itisconstantlyinthenews,throughitssponsorshipofhigh-profileambassadorsanditspendsalotofmoneyonadvertising.ItisrumoredthatitsannualmarketingbudgetisA$50million(US$35million)whenthecostoftherawmaterialsforalloftheproductsitmakesislessthanA$5million(US$3.5million).VitaminCisnotspecial–beingpartofthebrandimageandlifestyleSwissepromotesisspecial.MorethanUS$1billionworthofspecial!
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6. behavioural biasesItishumannaturetowantitnow.Butitisalsohumannaturetomakeplansforthefuture,includingsavingmoney.Ofcourse,thetwonaturesquicklycomeintoconflict.Youwantaholidaynow–butspendingthemoneywillreduceyourpensionin30years’time.
Moreoftenthannotyour‘present’selfwilldefeatyour‘future’self.Thefuturelossissofarawaythatitisdiminished,butthepresentbenefitisNOW!“Packyourswimsuithoney,wearegoingtothebeach”.
Thereisgoodreasontobelievethatrobo-advicesystemsmightdoamuchbetterjobthanhumansystemsathelpingpeopleconfrontandmanagethis‘present-day’bias,byallowingthemtovisualizetheimpactoffinancialdecisionsmadenowprojectedintothefuture.
Thecostsofmanipulatingandreportingdatathatalreadyexistswithintherobo-advisor’sdatabasesisnegligible,tonil.Therobocandoitinmanydifferentwaysthatarefarmoreengagingthansimplysendingapaperstatementaboutthevalueofyourinvestmentseverysixmonths.Robo-advisorscancreateemails,texts,tailor-madevideos,customized webpagesandmore.Thedataistheretobeiteratedas youplease.
Forseveralyearsithasbeenpossibleformanagersofretirementsavingsandinvestmentstoreporttotheirclientsusingtailor-madevideos,withavoiceoverscriptalongthelines:
HiGeorgina.Youarenow60%ofthewaytothe<<insertfinancialgoal>>goalyousetforyourself.Greatwork!Youare15monthsaheadofschedule!
DuringthevideoweseeGeorgina’sfinancialgoalandhistoryportrayedinchartsandforecastsonthescreenasthenarrationdiscusses:
Thisishowyoudidit.Yourcontributionswere<<insertamount>>andyourearningswere<<insertearningsrate>>percent.Ifeveryyearwaslikethisyou’dreachyourfinancialgoalin8yearsand7months.Butamorerealistictarget,toallowforfluctuations,isaround10years.Eitherway–greatjob!Youareontrackforsuccess.
Thesefullyautomatedvideosarecreatedusinga‘data-dump’fromthefinancialservicesfirm.Theprovidercancreatemillionsofvideosatatime.
Justasbathroomscalescanbeamotivatortodiet,thesetypesofcommunications,atwhichrobo-advisorsshouldexcel,maybeatruemotivatorformanypeopletoovercomepresent-daybiasandsaveforthefuture.Theproliferationofinteractivemobiledevicesoffersagreatplatformforrobo-advisorstointeractgraphicallywithclients,nudgingthemtomakebetter-informedfinancialdecisions.
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2.3 The ChAllenGe oF ACQuiRinG CuSToMeRS
Thecostofacquiringcustomersistheperpetualthorninthesideofthefinancialservicesindustry.Inmostcasesthecostsofactuallyservicingtheclientaresmall,comparedtothemarketingcostsofbringingtheclientonboard.
Everydiscussionandnewsreportappearstostartwiththeassumptionthatrobo-advisorssomehowfindtheirowncustomers.Theconversationthenquicklymovesontohowefficientlytherobo-advisorwilldealwiththesecustomers.
Thisisadangerouslyincorrectassumptionwhichwill,inevitably,destroymanymillionsofdollarsofshareholdercapitalandspoilmanycareersinfinancialservices.
‘Ifyoubuildittheywillcome’simplydoesn’tapplyinfinancialplanningservices.Wecanreadilystrollthroughagraveyardoverflowingwithwell-made,fit-for-purpose,innovativefinancialplanningITplatformsthatdiedforthesamereason–theycouldnotengageenoughcustomerstofeedthemselves.
SiliconValley’sinvolvementinrobo-advisorshashadabiginfluence.Its‘Builditfirst,worryaboutthecustomersandprofitslater’mantraworksinmanyuniverses,likesocialmediaandcomputergames.Butinthefinancialservicesuniversethatattitudemaybeilladvised.Customershavealwayshadtobefound–onlyaminoritycomesknockingonyourdoorbeggingforservice.
Theclientacquisitionissueisslightlydifferentforthoseestablishedorganizationswhohaveexistingclients.Thereisariskofcannibalizingtheexistingbusinesscombinedwithunsettlingexistingconsumerexpectations.
Largeplayersinfinancialserviceshavetwofeaturesincommon–theenormouspilesofcashrequiredtogenerateleadsandarmiesofhumanstoprocessthoseleadsandconvertsomeintocustomers.
Thoseexistingsalesprocesses,thickwiththeirhumaninteractionsandrelationshipbuilding,havetraditionallyactedasamoatagainstnewentrantswhocouldnotaffordtofindsuchasalesforcetodistributetheirproducts.Robo-advisorsarenotgoingtochangethewaycorporationssetaboutfindingtheircustomers–theywillstillbeacquiredthroughmarketingandreferral.
Butrobo-advisorswillchangethewaythatthecontrollersoflargecommunitiesofpeoplesetaboutprovidingfinancialservicestothosecommunities.Thisiswherethemaximumrisksliesforexistingplayersinfinancialservices.Robo-advice,purchasedaswhite-labelandbrandedforacommunity,willdislodgecurrentproviders.
Thecostofacquiringacustomerwithinacommunityisafractionofgoingtothe
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widermarket.Weallknowthistobetrue–itiswhyfinancialadvisorsjointhegolfclub.
Sowhoarethecontrollersoftoday’scommunities?Theyareallaroundus!Theyare:
• Corporations
Peoplecanbecrazilyloyaltobrandstheylove.Thosebrand-loyalistsareacommunity.Apple,forexample,hasthemostloyalandcommittedcustomerbaseofanyITcompany.Imagine,foramoment,theimpactofAppleofferingfinancialservicesthrougharoboembeddedintotheoperatingsystemofitsiPhonesandiPads.
• Community groupings and associations
Churches,sportingclubs,andcommunitygroupsarejustafewexamplesofself-selectingclustersofpeopleforminginactivitiesinwhichtheyhappilychoosetoparticipate.Theseclustersareengagedandeasytocommunicatewith–theycanbesoldtoatverylowcost.Andtheywillbe,inevitably,biasedtowardsanofferthatemergesfromwithintheir‘circleoftrust’.
• People who have followers
Today,alocalbloggermayhavehundredsofthousandsofpeoplereadingtheirblogdailyorweekly.SomeonewithapopularYouTubechannelmayhavemillionsoffollowersgettingregularupdatesintheirinbox.Meanwhile,theworldinwhichwelive,billionsofpeoplefolloweverybreaththatKimKardashiantakes.Iftheywillbuyherperfume–andtheydo!–whywouldtheynotbuyherinvestmentwebsite?Allshehastodotodrivetrafficthereistomakeonetweet–marginalcost,$0.
Arobo-advisorcanbeallplaces,atalltimes,foralltechnology-engagedcustomers.Robo-advisorsbridgethemoatandallowanewentranttocrashthemarket.Brandedrobo-advisorsarequickandrelativelylowcosttodeployifyoucansupplythecustomers.Arobowillletyouleadyourfollowersoffthetraditionalfinancialservicesgrid,awayfromtheestablishedindustryplayers.Thekeytoprofitablefinancialservicesbusinesses,whetherhumanorrobo,isstilltheacquisitionofcustomersatareasonablecost.
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2.4 WhY Robo-ADviSoRS ARe ChAnGinG The FinAnCiAl DiSTRibuTion lAnDSCAPe
Intheirquesttofindclients,weseerobo-advisorsasbeingasdisruptivetothefinancialservicessectorasUberisbeingtopublictransport.
Uberisagreatexampleofsomethingthatwasmadepossiblebytheinternet.Withoutthenet,Ubersimplycouldnotbe.Andyet,theinternetalonedidnotchangetheworldoftaxis–Uberdidthat.Theinternetwascertainlyavitalpieceofcommunicationsinfrastructurewhichallowedaworld-changingthingtohappen.Butit’snotthetechnologyitselfthatisrevolutionarytoday–itishowitconnectspeople.
Currently,thedebateislimitedtohowrobo-advisorsaffectestablishedplayersand,giventheirexperience,capital,advertisingandexistingclientbases,youcanbeassuredthattheestablishedplayerswillbeatthetable.Surprisingnewentrantsmayemergeintherobo-advicesectorthatmaychangethefundamentalrulesofthefinancialservicessector.WhatifAARP(AmericanAssociationofRetiredPersons)enteredthemarketwithabrandedwhite-labelrobo-advisor?WhatifAldiorLidldidtoo?
Atthesametime,weseeandacknowledgeadegreeofresistanceandbacklashtorobo-advisors.Thisisunsurprisingas,historically,allnewtechnologiesareviewedwithsomesuspicion.
Youwillverysoonbesparedthesharpshockofyourdoctor’sicy-coldmetallicstethoscopeonyourchestorback.Everyonethoughtitsinventor,ReneLaennec,wasalunaticandrejectedhisdeviceoutofhand.Twohundredyearson,onlyalunaticcouldimagineadoctor’ssurgerywithoutastethoscope.
ButLaennechimself,fromhisrestingplace,mightbealittleresistantaboutthelatestdisruptertohispatch.
Hand-heldultrasoundscannersarethreateningtoreplacehisstethoscopebecausetheyareasuperiortool.Theyaremoreaccurate,morereliableandevenintelligent;theyusealgorithmsandheuristicstomakeadiagnosis.WhathopethenforLaennec’sstethoscope,onceconsideredacutting-edgetool?
Whichleadsustotwocriticalquestionsthatmostpeopleask:
1. Arerobo-advisorsbettertoolsthanhumanadvisors?
2. Ifso,willrobo-advisorsreplacehumans?
Theanswertoquestiononeisthatrobo-advisorsareverygoodatthelimitedfunctionstheyperform.Theirlackofhumanfallibilityalmostguaranteesthemtobefaster,moreaccurateandmoreconsistentthanyouorme.
Andso,toquestiontwo.Istoday’sadvisoralreadyonacountdowntooblivion?Thisisacompellingquestionanditiseasytofixateonit,particularlyifyourjobisonethatmightbereplaced.Butitisnottheonlyquestionposedbyrobo-advisorsnor,necessarily,isitthemostimportantquestiontobeasked.
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Nonetheless,let’sdealwithit.
Robo-advisorsbringviableself-servicetofinancialadviceforthefirsttime.
Theiradvicewillbelowcosttodeliver(althoughperhapsnotlowcosttomarketandpromote),consistentandmakeiteasiertomaintainmeaningfulconversationswithcustomersabouttheirmoneythroughhighlyeffectiveautomatedcommunications.
Astravelagentsandbanktellersknow,manypeoplewillself-servewhentechnologyallowsthemto–andifenoughpeopleself-serveyoucanstartreplacingemployeeswithmachines.Butmakinginvestmentsisdifferenttobuyingair-tickets.Alotofpeoplewantthecomfortthatdealingwithanotherpersoninatrustingrelationshipcandeliver.
Thesecondfactortorecognizeisthesignificancethatrobo-advisorsarelimitedinfunctionandscope.Westillneedpeoplewhenthingsgetoutsidethebox.
Thereisnotarobointheworldtodaythatproducesameaningfulanswertoverycomplexfinancialsituations.Forexample,therearenoalgorithmsthatweknowofthataddressestateplanningconsiderationsacrossmultiplefamilyunitsusingassetsheldindifferenttrusts.Itisgoingtotakeaperson(andquiteaskilledoneatthat)toaddressthoseissuesusingallthetraditionaltoolsintheirfinancialadvisorkit.
Thatisnottosaythatnojobswillbelostbecauseofrobo-advisors–therewillbelosses.JustasarmiesofclerkslosttheirjobsbecauseMicrosoftExcelwasbetteratdoingthemundaneslogworkthanthem,robo-advisorswillreplacepeopleintasksthatareprocessdrivenandlendthemselvestoautomation.
Weseethedaysofsomeonewithaclip-boardtakingafinancialhistoryinafact-findasbeingverylimitedindeed.Thisraisesaninterestingquestionofhowmanyadvisorswillengageclientsinadiscussionabouttheirfinancialaffairsasmanycurrentlyusethefact-findasaninterpersonalget-to-know-yousession.Whenclientskeytheirowndatafromhome,theadvisorneedsanewtooltogeneratethatdiscussionandengagement(wearguethattoolisadiscussionoftheperson’srisktoleranceandwhatthatmeansforthemasinvestors).
But,overall,weseeadvisorjobsasbeingatriskmoreatthemargins–wedon’tseemasslay-offsoffinancialadvisorstobereplacedbyrobo-advisors.Jobsareevolvingallthetime–displacement,inourview,isnotwhyrobo-advisorsreallymatter.
Meanwhile,peoplearesimplytoogoodatsellingfinancialservicestobedumpedasadistributionchannel.Face-to-facemarketingwillalwayshaveaplace–butfromwhatweseetodaywecannotanticipatehowbigthatplacewillbeinthefuture.
Forlarge,existing,playersinfinancialservices,robo-advisorsmaybeanopportunitytolowerback-officeandservicingcostsoropenupnewdistributionchannels.Theywillhavetheenormousmarketingspendrequiredtogenerateleadsandconvertsomeintocustomers.
Atthesametime,thatverysametechnologyinthehandsofadisruptivenew-entrantcouldstrikeadeathblowtomanyestablishedfinancialservicesfirms.Withrobo-advisors,thecompetitivequestionmightbecome‘DoyourememberBlackRockandSchwab?TheyusedtobeinfinancialservicesbackbeforeAppleincorporateditsrobo-advisorintotheoperatingsystemoftheiPhone8.
Robo-advisorsarequickandlowcosttodeploy,allowinganyonewithacommunitytocreateandbrandtheirowninvestmentplatformforthatcommunity.Fromachurch,toafishingclub,toapopularbloggertoAmazon.Ifyoualreadyhavethefollowers,arobo-advisorwillletyouleadthemoffthetraditionalfinancialservicesgrid.
Thatiswhereweseethethreattotheexistingindustryplayersandtheopportunityforthedisruptersandnewentrants.Andthatiswhyrobo-advisorsmattersomuch.
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2.5 Robo ADviCe FoR ADviSoRS
In1994,OJSimpsonwasontherunfrompolice,theUSFederalReservewaspayingyieldsof8.5%andagallonofgascostUS$1.09.Itwasalsowhenwestartedthinkingaboutinvestmentsuitability–matchinginvestmentstoclientsandtheirneeds–andwe’vebeendoingiteversince.
Overthattwenty-oneyears,wehaveworkedextensivelywithadvisorsaroundtheworldtohelpthemdeliversuitableinvestmentadvicebyaccuratelyandscientificallyassessingtheirclient’srisktolerancewithaprovenpsychometrictest.We’vecometoknow,andunderstand,advisorsverywell.We’vedonenearlyonemillionriskprofilesformorethan6,000top-endadvisorsinmorethantwentycountries.We’vefoundthatpeoplewhoareinvestedinaccordancewiththeirrisktolerancetendtobemorelikelytostayinvestedforthelongerterm.Thatmeansamoreprofitableadvicebusinessfortheadvisor,becauselong-termhappyclientscreatefewerfrictionsandrefermoreoften.
Backin1994wesawtheareawhereanadvisor,theclientandinvestmentsmeetwasliketheBermudaTriangle–whilemosttravelledeasilythroughit,manydisappeared.Wecouldn’tunderstand(andstillcan’t)whysomanyfinancialadviceprocessesemphasizethespeedofthesale,ratherthanthequalityofthesale.Agoodsalecancreatealong-termclient,whereasarushedsalecancreateaclientwhobecomesunhappyandvanishes(orevenworse,resortstolitigationagainstyou).
Webelievethatarigorous,scientificassessmentofrisktoleranceisanessentialstepinagoodsale.Ittookusmorethanfouryearstoindustrializethatbeliefintoa25-questionpsychometricrisktolerancetest,whichwaslaunchedin1998.Sincethen,wehaveconfirmedthatrisktoleranceisattheheartofsuitableadviceandhappyclients.
We’veprovedthatrisktoleranceisastablepersonalitytrait–evenwhenconfrontedwithmajormarketupheavalssuchas2007-08.Weknowthatifyoumatchtheinvestmenttotheclient,thentheclientismuchmorelikelytostaywiththeinvestmentthroughgoodtimesand,moreimportantly,whentherearestorms.Whilethecoreofourbusinesshasbeenadvisors,wealsoworkextensivelywithsomeoftheworld’slargestandmostsuccessfulinvestmentmanagerstomaptheirmulti-assetportfoliostoFinaMetricarisktolerancescores.
Today,weareworkingwiththenextevolution,robo-advisors.Automated-advicesystemsneedsmartinvestmentsuitabilitytools,likeourrisktolerancetestandmappings,to‘plug-in’totheiralgorithms–justaseveryminerintheCaliforniangoldrushneededashovel.Ourrisktolerancetestisthebestofbreed.Ithasbeentriedandtestedandwebelieveitshouldbecomethestandardsuitabilitytestforrobos.TheymayevenboastaboutusingFinaMetricaaddingvaliditytotheadviceprocess,indeedFinaMetricaPRactivityisaimedatdevelopingthebrandtosupporttheadvisorcommunity.
So,basedonallweknow,hereisourtakeonwhatrobo-advisorsmeanforyou,thehuman-advisor:
1. Robos are big.You’regoingtohearalotaboutthemandtheywillimpactonyourlife.Webelievethattheimpactwillbeoverwhelminglypositive!Don’tbelievethegloomthatsaysroboswillreplacehumanadvisors.Theywon’t.
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2. Robos will be everywhere.Everyoneinthefinancialservicessupplychainwillhavearobo,eitherasadirect-to-consumerofferingorasatoolforfinancialadvisorstouse.
3. Your client base may be under threat.Roboswillbeeverywhereandyourclientswillbecourtedbythem.Yournewcompetitormightbeacluboracommunitybasedorganizationoraffiliate–anyorganizationwithalargemembershipcouldsoonbeinthemarketforawhile-labelrobo.
4. There will be many different robos for different purposes.Youwillhaveachoiceofrobos,whichwillnotallbethesame.Ifyouplanonworkingwithanyoneyouwillneedtoassessitcarefullytoensureitwillbefitforyourpurpose.
5. early-movers don’t necessarily win.BettertomakeaconsidereddecisionanduseproventechnologyandprocesseslikeFinaMetrica’sriskprofilingsystem.
6. Robos will have to adopt suitability standards.Toflourish,roboswillhavetomeetthesamesuitabilitystandardsashumanadvisors.Itisunimaginablethatanadvicebusinesswouldwantthesameclientgettingadifferentrecommendationdependingonwhethertheyusedroboorhumanadvice.Abusinessbuiltonamulti-factorassessmentofrisktolerance,riskcapacityandriskneededwill,ofcourse,expectthosesamestandardsinarobo.
7. Dealing with non-assigned clients and other relationships.Robosarequickandaccurateatprocesswork,likecollectingdata.Andtheymakethingsfast–aninvestmentrecommendationcanbeonthetablemomentsafterthedataiscollected.Itwill,ofcourse,beexpectedthatrobosmustintegratewithyourbusinesspractices.
8. low-cost, multi-asset portfolios are here.Robosdealinverylow-costinvestmentstructuresandthatisgoingtochallengecurrentthinking,currentpracticeandprofitability.Likeripplesinapond,overtimetheeffectbecomesunpredictableevenwhenitstartedoutverystructured.
9. You will have to prove your value proposition.Advisorsareprofessionalswhoaddvaluetotheirclients’financiallives.Bereadytoprovethat,becauseyouwillhavetobeabletodosupplythatprooftochargehigherfeesthanarobo.
10. Fees may come under pressure.Justaslow-costairlinesloweredairfarecosts,robosarelikelytobringdownthebase-costofadvice.But,justaswiththeairlines,somepeoplewillnotwanttoflywiththecheapest;somewillbehappytopayfulleconomyandsomewillwantthesilver-servicethatcomeswithfirst-class.Themoreholisticanddetailedyouarethemoreyouwillwin.Robosarenotcurrentlygoodatcomplexmatterssuchtaxorestateplanningorinsurance.Possiblywewillseetraditionaladviceoperatingtocreatethefinancialplan,withrobosdealingwithongoingtransactionalneeds.
Therobospaceischangingveryquickly.Thisreportonroboshasbeenrewrittenseveraltimes,aseverytimewebelievewearefinishedanewstoryemergestochangethelandscape.
FinaMetricaisworkingontechnologytoanalyzetheongoingsuitabilityofinvestmentsforclientsonbehalfofroboproductproviders.Thiswillhelpguidecommunicationstrategyandengagementwithclients.
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SeCTion 3 Robo-ADviSoR
MARKeT AnAlYSiS
3.1 The Robo-ADviSoR booM in The uS
Americaistheepicenteroftherobo-advisorboom.Anyseriousdiscussionsaboutrobo-advisorsandtheirimpactsarerootedintheUSexperience.
TheUShasthetechnologicalsavvytodeveloprobo-advisorsandtherightregulatorysettingstoallowthemtoflourish.
Robo-advisorsarebeginningtogatherpaceintheUK,buttheyarenotaswellestablishedthereinpartduetothestrictregulationsinplacewhichmakethemsuitableonlyforverylimited,simplifiedadvice.Europeismoreencouraging,butisaslow-growthregioncomparedwiththeUS.
AstudybyCorporateInsightshowsthat,collectively,robo-advisorsintheUSdirectlymanageaboutUS$19billionAUM(assetsundermanagement)asofDecember2014.Thisisa21%increaseinAUMsinceJuly2014,anda65%sinceApril2014.Theseareveryimpressivegrowthnumbersinanindustryunderpressurefrommanydifferentforces.Ofcourse,itiscomingfromanadmittedlylowbase–robo-advisorsholdlessthan1%ofthetotalmarket.
AlthoughAUMisasomewhatcrudemetric,itisundeniablethatawarenessofrobo-advisorsintheUSisincreasing.
A.T.Kearney’sstudyfoundthatapproximately20%ofconsumersintheUSareawareofrobo-advisoryservices.Unsurprisingly,themajorityofearlyadoptersofrobo-advisorsareagedunder35years.
Americaisalsoasomewhatuniquemarketplace,wheretheadvicegapisveryrealformanylower-wealthinvestors,whodonothaveanyaccesstoanykindoffinancialadvice.Robo-advisorsareseenawaytodemocratizefinancialadviceforthissector(ataprofit,ofcourse–shouldthatbepossible,giventhemarketingcosts).
25%
25%
22%
20%
13%
13%
12%
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ItisinterestingtoanalyzetheA.T.Kearneyresearchregardingthefactorsthatwereimportanttocustomerswhenchoosingarobo-advisoryoffering.
Pricingisclearlythedominantdriver.Itis,perhaps,alittlediscomfortingtoseethatonlyoneoutofeveryfourcustomersexpectstheirinvestmentmanagertobecompetent!Itisinterestingtonote,meanwhile,thatveryfewpeopleareexpectingtheirrobo-advisortoofferthemanyformofrelationship.
Todate,theboomforrobo-advisorshasreallybeeninpublicrelations–itisimpossibletoreadindustrypresswithoutseeingmanyrobo-advisorstories.Eveninthemainstream,themediaispresentingstoriesaboutrobosfromauser/customerperspective.
Weseethesestoriesastinypocketspoppingupfromahugegroundswellofactivityinthefinancialservicessector.
Weknowthatstrategysessions,boardmeetingsandbudgetsareallbeingsetasideforimplementingrobotechnologies.Muchofthisworkisbeingundertakenprivately–thereisnowayofknowingwhateveryoneisworkingonorwhatwillcomeoutofthisboomininvestmentindevelopingroboplatforms.
Thebarrierstoentryforprovidingrobo-advicecanbelow.
Acompanycouldpurchaseawhite-labelrobo-advisor,perhapsfromBlackRockafteritsrecentpurchaseofFutureAdvisor,andhaveanofferinginthemarketplaceintheblinkofaneye.Thismayalsobethemosteffectivewaytode-riskarobofromabusinessperspective.
Relationshipservices
Simplicity
Investmentexpertise
Pricing(cost)
16%
23%
25%
36%
0.00% 10.00% 20.00% 30.00% 40.00%
DRiveRS FoR ChooSinG A Robo-ADviSoR
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FinancialcommentatorMichaelKitceshaswrittenontherecentBlackRockacquisitionofFutureAdvisor.FutureAdvisorisoneofthethreeoriginalandpurerobo-advisorswhichhasbeengatheringassetsandmanagingETFportfoliosdirectlyforconsumers.EventhoughFutureAdvisorhasjustUS$600millionofAUM,andanestimatedUS$3millionofrevenue,BlackRock’spurchaseisreputedtobeinexcessofUS$150million.
KitcessuggeststhatBlackRock’sstrategywasnotsimplytobuyFutureAdvisortoexpanditsdirect-to-consumersolution,butinsteadtopivotFutureAdvisortobecomearobo-advisor-for-advisorssolution,andlicenseorofferthetechnologyplatformtoawiderangeofbroker-dealers,insurancecompanies,banks,andcustodianstoturntheirhumanadvisorsintotech-augmentedcyborgadvisors.
Inthiscontext,astheworld’slargestassetmanagerandaleadingplayerintheETFspacealready,theBlackRockdealappearstobevisionedprimarilyasameanstofurthergrowthesizeoftheETFpieandtheBlackRock(iShares)marketsharebydrivingdistributiontoitsETFsthroughthisnewtechnologyplatform.Therobo-advisor,therefore,isnowadistributionchannel.AsimilarstrategyhasbeenundertakenbyLV=intheUK,withLV=havingtakenalargestakeinUKrobo-advisorWealthWizards.
OtherslikeNutmegarerecruitingfinancialadvisorstoaddtosupporttheircurrentautomatedprocess,perhapsrealisingthatfinancialadvisorsareanimportantpartofclientrecruitment.
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3.2 Robo-ADviSoR CASe STuDieS
WehavethreecasestudiesofUS‘pure-play’robo-advisorprocessesandsystemsinactiontoexamine:
1. FutureAdvisor
2. Betterment
3. Wealthfront
FuTuReADviSoRFutureAdvisor,thesmallestofthethreerobo-advisorsanalyzedindetailhere.ItwasrecentlypurchasedbyBlackRock.BlackRockisrumoredtohavepaidmorethanUS$150milliontobuyjustUS$3millionofrevenuefromUS$600millionofAUM,inETFportfolios.
Clearly,BlackRockwaspurchasingatechnologicalheadstartontherobomarketandnotarevenuestream.BlackRocksaysthatitwillmaintaintheFutureAdvisordirect-to-customerwebsite,butthatisobviouslynotacoredriverfortheacquisition.
PlatformslikeFutureAdvisorneedpassiveinvestmentchannelstofunctionandBlackRock’saresomeofthebiggestaround.BlackRockisoneofthelargestissuersofETFsandisthelargestassetmanagerintheworld.ItcouldwellviewFutureAdvisorasjustanotherdistributionchanneldownwhichtopumpindexfundsandETFs.
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beTTeRMenT Bettermenthasbeeninbusinessasarobo-advisorforjustoversixyearsyears.Overthattime,ithasreachedover100,000customersandhasmorethanUS$2.5billioninAUM.
Thechartshowsthereleaseofnewclientproductsoverthetime,fromtheoriginalofferingofgoal-basedinvestinginSeptember2011toretirement-incomeproductandtaxlossharvesting.
BettermenthashadfourseparatecapitalraisingsovertimetosecureatotalinvestmentofUS$105million.Astaffofover100servesthisclientbase,withfiveemployeesperforminganinvestmentadvisor/advisoryfunctionincludingresearch.Theratioofemployeesperforminganinvestmentadvisorfunctiontoclientsis,therefore,inexcessof1:12,000.Thisillustratestheefficiencyandleverageofferedbytherobo-advisormodelregardingadvice.Face-to-faceadvisorsgenerallyhave100to200clients–thatkeepstheirdiariesfilledfortheyear(somemay,inextremecases,haveupto1,000clients).
WhileBettermenthasbeensuccessfulinattractingasignificantnumberofclients,theaveragesizeofthoseaccounts(calculatedasAUMdividedbynumberofclientaccounts)isjustoverUS$22,500.
BasedonitsdisclosedfeeratesforaminimumaccountofUS$10,000(the‘better’rateof0.25%ofAUMperannum,billedmonthlyinarrears),thismeansrevenueofjustunderUS$50peraccountperannum.
Source:BettermentWebsite
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WeAlThFRonTWealthfronthasbeeninbusinessasarobo-advisorforjustoverfouryears.Wealthfrontclaimstobetheworld’slargestrobo-advisorwithUS$2.6billioninFUM.
Wealthfrontistargetingtheso-calledtech-savvymillennials(millennialsarethosebornbetween1980-2000).Todate,60%ofitsclientsareagedunder35yearsand90%areunder50yearsold.
WealthfronthashadfiveseparatecapitalraisingsovertimetosecureatotalofUS$129million.It,too,wasredhotwithinvestors–withFutureAdvisorbeingsnappedupit’sbecomeevenhotter.
AccordingtoWealthfront’sCEO,theaverageaccountsizeofits22,000clientaccountsisjustoverUS$90,000:ThisisoverthreetimeshigherthantheaverageclientaccountatrivalBetterment.
Wealthfrontdoesn’tchargeanythingforthefirstUS$10,000invested(atrust-building‘free’trial),withamanagementfeeof0.25%abovethat.ThismeanstheaveragefeeperaccountisaroundUS$175.
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hoW Robo-ADviSoRS MARKeT TheMSelveS
Interestingly,bothWealthfrontandBettermentareusingsimilarmarketingmessagesfocusingon:
• Easeofuse;
• Accessible–open24/7;
• Worksonmultipledevices;
• Freeuptimetogetonwithlife;
• Lowcost–previouslyonlyavailabletothewealthy;
• Onlysmallinvestmentaccountsizerequired;
• Co-creation:youdesigntheportfolioalongsidetheservice;
• Transparency––nopremiumforthepretenseofapersonalrelationship;and
• Clientcentricandpersonalized–rebalancing/riskreduction/diversification.
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Themarketingmessagesaredisseminatedthrough:
• Blogs;
• TVandprint/onlinemedia;
• Onlineadvertising;and
• Word-of-mouth,offeringexistingcustomersbonusesforrecruitingtheirfriends.
The Robo-ADviSoR MARKeTBoLu,theCEOofFutureAdvisor(nowpartofBlackRock),usedtodescribethesizeoftheopportunityforhisproductintheseterms:
“Thereare32millionmass-affluentAmericans–withassetsbetween$100,000and$1million–andonly20%haveanadvisor.60%offamilieswithmorethan$1millionininvestableassetsalreadyworkwithafinancialadvisor.80%ofourclientsneverhavehadanadvisor.Noecosystemhaseverservedthesepeople.That’sabiggapthat’sartificialandmadebyeconomics.Wewanttobringthepenetrationuptowhereitisfortheaffluent,andthatisa14-million-householdopportunity.”
Thetargetclientbaseforrobo-advisorstartupsisthetechsavvy,themature,theappfriendlyormillennialsreachingadulthoodinyear2000.
It’sthosewhopreferTwittertoreadingthenewspaperorsomeonewhobookstheirdinnerreservationviaOpenTableinsteadofcallingtherestaurant.Thosewhoresearchandactinmostsituationsinavastlydifferentlymannerfromthewaypeopledid15yearsago.Forthiscohort,thismethodofonlineengagementwillbealsotruewhenitcomestomakingfinancialdecisions.Ifitcanbedoneonline,theywilldoitonline.
Formanypeople,thequestionboilsdowntohowinvestorswanttoorganize theirfinancesandinteractwiththeiradvisors.Willtheyprefercontrolandaccessibilityof24/7onlineaccesstostatements,positions,fees,andotheraccountinformationontheirsmartphone?Orwilltheypreferaface-to-faceconversationwithafinancialadvisorwhocanprepareandtalkthemthrough afinancialplan?
Webelievethesequestionsarestrategicallyflawed.Weconsiderthatrobo-advisorsarenotaneither/orquestion.
Boththehumanandrobooptionsarerequiredtoservethedifferentprofilesofclients.Thecomplexdecisionmayalwaysrequireface-to-faceinteractionwithanotherhumanbeing,whilethebasictransactionalexperiencemayonlyrequireaself-serviceonlineprocess.
Botheco-systemscan,andwill,existtogether–oneneednotconsumetheothertothrive.
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3.3 The lAG in The uK AnD euRoPe
Robo-adviceplatformsareactiveintheUKandEurope,butthesemarketslagtheUSintheriseofrobo-advisors.ThelagintheUKispronouncedandsignificantalthoughthesignsinEuropearegenerallymoreencouraging,withGermanyleadingtheexpansionoftherobomarket.
Iftheregulatoryenvironmentweremoreaccommodating,robo-advisorscouldplayanimportantroleinservicingtheUKmarket’sadvice-gapsector,wherepeoplefallbelowtheassetlimitsrequiredtobeviableclientsinaholisticadviceprocess.
Itisestimatedthatthereis£440billion(US$682billion)ofinvestableassetsamongthe43millionadultsintheUKwhofindthemselvesintheadvice-gap.Theysaveanother£54billion(US$84billion)eachyear.
The uK IntheUK,robo-advicesystemsfaceregulatorychallengeswhichhaveundoubtedlyslowedentryintothemarket.
Thosethatdoexistoperateonlyatthelowestlevelsofrestricted,focusedorsimplifiedadvice.Theyare,basically,transactionalmachines.Robo-advisorsaspiringtoriseanyfurtheruptheladdertowardsmoresophisticatedadvice–whichincludesaportfoliorecommendation–becomecaughtinastrangeclashofregulatoryandcomplianceregimes.
Theregulator,theFinancialConductAuthority(FCA),appearstoallowonlineadviceandtowanttoencouragethedevelopmentofrobo-advisors.Butappearancescanbedeceptive.TheUKlegislationonfinancialadvicerestrictshowliberaltheFCAcanbe.
TheonerouscomplianceobligationscoupledwiththeOmbudsman’sdecisionshaveraisedtheperceivedrisksofoperatingrobo-adviceplatformsinthisjurisdictionandstifledinnovationandgrowth.Themovementfromonlineexecutiononlywebsitestorobo-advicemodelsmeanssignificantregulatoryimplications,nottomentionsignificantprofessionalindemnityinsurancecostsandfinancialservicecompensationlevies.
FinAnCiAl ConDuCT AuThoRiTY Anyoneconductingduediligenceonbuying,buildingorestablishinganautomated-adviceprocessintheUKwould,naturally,beginwiththeFCA.Theproblemisn’ttheFCAitself–yougetthesensethatthefolksattheFCAwouldhappilytickrobo-advisorsquitereadily,ifonlytheycould.TheestablishmentoftheFCAProjectInnovateisamanifestationoftheirdesiretosupportrobos.Theissueiswhetherthelegislationitselfissupportiveandfitforpurposefortheroboenvironment.TheclashbetweenwhattheFCAmightwanttoencourageandwhatcanbeachievediseasytodemonstrate.
Let’sbeginwithwhatappearstobeaseriesofgreen-lightsforrobo-advisorsfromtheFCA.
TheFCA’sDirectorofPolicy,DavidGealeisonrecordassaying:
‘Ahealthyadvicemarketisoneinwhicharangeofdifferentmodelsexistanddeveloptosuittheneedsofabroadspectrumofinvestors.WebelievethatFG15/1willgivefirmstheconfidencetoinnovatetoprovidenewstreamlinedadvisorypropositionswithaclearerunderstandingoftheirresponsibilitiesandofwheretheboundarieslie’.
‘FG’is‘FinalGuidance’andFG15/1,towhichMrGealerefers,isessentialreadingforanyonewithaninterestinrobo-advisorsintheUKorwiderEuropeanmarkets.ItsfullnameisFG15/1:RetailInvestmentAdvice:Clarifyingtheboundariesandexploringthebarrierstomarketdevelopment.
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Meanwhile,theFCAhasmadeitknownthat:
‘Awell-functioningretailadvicemarketneedsdifferentdeliverymechanismstobefullyeffectiveforthebroadrangeofpotentialinvestors.Therecouldbebenefitsfromawell-designed,low-costmethodofmeetingconsumers’straightforwardinvestmentadviceneeds.Thechallengeistoensuresuchmethodswilldelivergoodoutcomesforthoseconsumers.’
Atthesame,theFCAhasestablishedProjectInnovatetohelpnewandestablishedbusinessestointroduceinnovativefinancialproductsandservices.ThroughitsInnovationHub,theFCAoffers:
• Dedicatedteamsandcontactsforinnovatorbusinesses;
• Helpforthesebusinessestounderstandtheregulatoryframeworkandhowitappliestothem;
• Assistanceinpreparingandmakinganapplicationforauthorization,toensurethebusinessunderstandstheUKregulatoryregimeandwhatitmeansforthem;and
• Adedicatedcontactforuptoayearafteraninnovatorbusinessisauthorized.
TheFCAsaystheInnovationHub‘willidentifyareaswhereitsregulatoryframeworkneedstoadapttoenablefurtherinnovationintheinterestsofconsumers’.WehavehadquiteafewdiscussionswiththeProjectInnovateteam.Theytellus,enthusiastically,thattheyaretalkingwithalotofdifferentbusinessesthatarekeentoinnovate.
That’stherhetoric–herearethefacts.Despitealloftheapparentpositivenesstowardsinnovation,as2015drewtoaclose,notasinglenewrobo-advisorhadbeenlaunchedintheUK.
Tofindoutwhy,wemustturntothelegislation.
TheUKlegislationaccordswithdirectivesfromtheEuropeanUnion,althoughsomedoarguethattheUKhastakenaneventougherstancethattherestofEuropeislikelytodo.
Eitherway,EUdirectivessuchasMiFIDIandII,whichcomeintoeffecton3January2017,havecreatedmoreonerousstandardsandobligationswhengivingfinancialadvice.
Essentially,thepersonsellingaproductmustensurethattheadviceis‘appropriate’forthecustomer–even,insomecases,wherenoadvicewasgivenduringthesalesprocess.
Thismeansthatinsomecasesandevenforexecution-onlysalestheadvisorhastoasktheconsumerformoreinformationtohelpitdecidewhethertheconsumerhasthenecessaryknowledgeandexperiencetounderstandtherisksinvolvedinthetransaction.
Thecategoriesof‘non-complex’productswillbenarrowedunderMiFIDIIsothatthe‘appropriateness’testwillapplyevenmoreoften.
Suitabilityrequirementsapplytoadvisedservicesandportfoliomanagement.Therewillbemoreonerousobligationsoninvestmentfirmstodeterminesuitability(includingofbundledpackagesofproducts).Firmsgivinginvestmentadvicewillberequiredtodisclosewhethertheywillprovidetheclientwithanongoingassessmentofsuitabilityoftheproduct.
Periodicreportsmustbeprovidedtoclientsincludinganassessmentofthesuitabilityoftheportfoliounless,inthecaseofinvestmentadvisors,thefirmisnotcarryingoutaperiodicassessmentofsuitability.Firmsprovidinginvestmentadvicemustprovideclientswithastatementspecifyingthebasisonwhichtheinvestmentrecommendedissuitablefortheclient.
Theramificationsofthisfortherobosectorhavebeenprofound,withnooneyetpreparedtobringaroboproducttomarketunderthisregime.
IntheUKtodayoperatorsmustnavigateaminefieldof‘simplifiedadvice’versus‘limitedadvice’versus‘focusedadvice’versus‘regulatedadvice’versus‘personalrecommendation’versus‘genericadvice’.Youcanveryquicklydrowninallthe‘blah,blah,blah…’thataccompanieseachofthoseterms.
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FinAnCiAl oMbuDSMAn SeRviCeTheUK’sFinancialOmbudsmanService(FOS)isanindependentarbiterindisputesbetweenconsumersandbusinessesprovidingfinancialadvice.Eachcomplaintisdecidedonthemeritsofthematter,basedonwhattheOmbudsman–asanexpert,impartialobserver–believestobefairandreasonable.
TheOmbudsman’sdecisionsreflectthetwinthemesof‘informedconsent’and‘suitability’.TodefendaclaimbeforetheOmbudsman,thegiverofadvicemustbeabletodemonstratethat:
1. They‘knowtheirclient’byconductingadatacollectionincludingrisktolerancetesting;
2. Theyhaveadocumentedprocessforselectingsuitableinvestmentproductsbasedoninformationobtainedinstep1;
3. Theyexplainedallthedetailsandriskstotheclientandhavedocumentationtosupportthis;and
4. Theyreceivedformalacknowledgementfromtheclientthattheyhadacceptedthisinformationandtherecommendation.
FormoreinformationontheOmbudsman’srulingsrefertosection5.1AssessingaRobo-Advisor.
‘simplified advice’ ‘limited advice’
‘focused advice’
‘regulated advice’‘personal
recommendation’
‘generic advice’
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SeCTion 4 ASSeSSinG
ARobo-ADviSoR
4.1 ASSeSSinG A Robo-ADviSoR
Howarewetoassessarobo-advisor?
Thisisatop-of-mindquestionforanyoneconsideringbuilding,buyingorimplementingarobo-advisorprocess,alongwithotherquestionssuchas:
• Howdoweensurethisthingdoesn’tgetussued?
• Howdowecomplywithvariousrulestoensureregulatorsdon’tsanctionus?
• Whatframeworkorguidelinescanwepointtoinordertodemonstratethatourrobogivessuitableadvice?
CharlesSchwab’spaper“Gainingperspectiveonautomatedinvesting”putsforwardalistofhigh-levelquestionstohelpthedecision-makingprocessinconsideringtheopportunityandafirm’sreadinesstocapitalizeontherobo-advisormovement.Whilenotcomprehensive,thefollowinglistofquestionsareexamplesofwhatmightbeasked:
• Haveweturnedawayclientswhocouldhavebeenagoodfitwithourservicemodelifwehadbeenabletoreducethecostofservingthem?
• Canweincreasethenumberofprofitablerelationshipswehavebyidentifyingwaystoservesmallerclientsmoreefficiently?
• Arewecurrentlyservingclientswhoarebelowouraccountminimum(perhapsfamilyandfriendsofcurrentclients)?
• Wouldwebeinterestedinexpandingourteambyaddinganewadvisorwhosetypicalaccountsizeisbelowourfirm’saccountminimums?
• AmIopentotakingonyoungerinvestorswithsmallerportfoliosbuthighpotentialasawaytofuelfuturegrowth?
Unfortunately,therearegenerallynoclearrules,regulationsorguidelineswhenitcomestorobo-advisors.Peopleaskingthesequestionsarenotgettingalotofanswers.Theymustsiftthroughvariousdatatoinfertheirownanswers.Manyaresimplybeingleftinthedark.
Wewouldliketoshineaflashlightonthesequestions,becausewebelievethatwehaveconstructedanintelligentframeworkthatwillallowrobo-advisoryprocessestobeassessedfor:
• Businessrisk;
• Regulatoryrisk;and
• Investmentsuitabilityrisk.
Inconstructingourframeworkwefoundthesetoolstobeuseful:
• DatafromtheUKFinancialOmbudsmanService(FOS),whichgivesinsightsintotheflawsinprocessthatoftenresultinafindingagainstafinancialservicesprovider;and
• TherecentInternationalOrganizationofSecuritiesCommissions(IOSCO)publication‘ReportontheIOSCOSocialMedia&AutomationofAdviceToolsSurveys’.
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IntheFOSdata,ourinterestliesinthecaseswheretheOmbudsmanfoundnofaultbytheserviceprovider–whatarethecommoncharacteristicsofprocessinthosecompaniesthatmeanttheyescapedcriticism?
TheIOSCOisawindowintothemindsofregulatorsaroundtheworld.Itmapstheirconcernsaboutrobo-advisorsandpresentsaseriesofred-flagstonotewhenbuilding,buyingorimplementingarobosolution.
Byputtingthetwotogetherweemergewithveryclearguidelinesabout:
1. Whatconstitutes‘best-practice’forrobo-advisors;and
2. Whatfaultsandflawscouldeasilyleadtolegalactionorregulatorysanction.
WhAT To ASSeSS
Think,foramoment,ofarobo-advisoratitsmostfundamentallevel:
1. Ausercompletesanonlineprocessaboutthemselves;
2. Therobo‘thinks’,usinganalgorithmthatisunknowntotheuser;and
3. Therobosuggestsacourseofaction.
Thestep1dataisclearlycriticaltotheentireprocess.Soitfollowsthattheremustbeaveryrobustdatacollectionframeworktoavoidthesystemsufferinga‘garbagein–garbageout’fault.Assumingtheinputdataisrobust,wemustthenturntotherobo’s‘thought-process’.Whatrulesandprinciplesdoesthealgorithmapply,andwhy?
Wefind‘suitability’tobeaveryusefuloverridingtermforestablishinganassessmentframework,asitcapturesthetwocriticalissues:
1. Haveyoumadesuitableinquiriesofyourclienttoknowenoughaboutthemtobeablemakearecommendationrelevanttotheircircumstance?
2. Istherecommendationyoumakesuitabletothem?Thestandardproxyforsuitabilityistheclient’sriskprofilewhichincludestheperson’srisktolerance–doestherecommendationaccordwiththeriskprofile?Therearehugevariancesinhowdifferentpeopleassessrisktolerance.Someassessmentsareflawedandareoflittleuseindeterminingsuitability.
Withtheprincipleofsuitabilityinmind,inthenextchapterweminetheFOSandIOSCOdataforindicatorsofhowanindependentobserverandtheglobalregulatorsdetermineifsuitabilitystandardshavebeenmet.
Think, for a moment, of a robo-advisor at its most fundamental level: 1. A user completes an online process about themselves; 2. The robo ‘thinks’, using an algorithm that is unknown to
the user; and3. The robo suggests a course of action.
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SeCTion 5 The Robo RelevAnT
ReGulAToRY lAnDSCAPe
5.1 AnAlYSiS oF The FinAnCiAl oMbuDSMAn SeRviCe CoMPlAinTS DATA
Financialbusinessesenteringtherobo-advisorspacewillbeinterestedtoknowandunderstandthefinancialrisksinvolved.AnimportantpieceofthejigsawpuzzleistheFinancialOmbudsmanService(FOS).
TheFOSwasestablishedin2001undertheprovisionsoftheFinancialServicesandMarketsAct2000tohelpsettledisputesbetweenconsumersandUK-basedbusinessesprovidingfinancialservices.ItisimportanttoreviewtheattitudeandapproachtakenbytheFOSinitswork.TheFOSstatesthatthelawrequiresittodecideeachcomplaintonacase-by-casebasisandusingitsdiscretiononwhatitbelievestobefairandreasonable.Indoingso,theFOSrulesrequireittotakeaccountofthelaw,rulesandgoodpracticeintheindustry.TheFOSapproachistoaskquestions,listentobothsidesofthestoryandthendecideeachcaseonitsindividualfactsandmerits,notonhowcleverlyorpersuasivelyeithersidearguestheir case.
OurreviewofasampleoftheFOSdatahighlightsthattherearecommonpatternsthathaveimportantimplicationsforrobo-advisors.Complaintsthatarenotupheldtendtohavethefollowingincommon:
• Evidenceofwell-documentedadviceincludingexplanationofchargesessentiallyleadingtotheabilitytodefendtheadvisor’srecommendations;
• Evidenceofdocumentedclientacceptance–manyexamplesofcomplaintsarerefutedbytheclient’sdocumentedacceptanceofrecommendations;
• Demonstrateduseofrecognizedriskprofilingtoolsandaclearandwell-documentedinvestmentsuitabilityprocess;and
• Evidenceoffollowinganonlineprocess–therearemanyexamplesoftheOmbudsmanreferringtotheabsenceofsupportingevidencefromthecomplainantwithregardstoonlinesystems.TheFOSstatesthatitsdecisioninacaseismadeontheciviltestofthe“balanceofprobability”andthiscanbeachievedthroughthepresenceofanestablishedandwell-runonlinejourneyorprocessforallconsumersalike.
TheabsenceofanyoneofthesefourpointsoftenmeansthatanFOScomplaintmaybeupheld.Itisworthnotingthatacommonmistakeleadingtoacomplaintbeingupheldistheroleofanadvisorindocumentingaprocess(suchasdefiningthecomplainant’sriskprofile)butthenrecommendingaspecificinvestmentthatdoesnotmeettheprofile.
ThattheFOSmayarriveatdifferentoutcomesonseparatecasesshouldnotbeseenassurprising.ItisnotaquestionofinconsistencybutamatteroftheFOSlookingateachcomplaintindividuallyandmakingadecisiononwhatitbelievesisfairandreasonableinthecircumstancesofthatparticularcase.TheremaybesurfacesimilaritiesbetweensomecomplaintsbutwhenlookedatindetailtheFOSoftenprovideverydifferentoutcomesbasedonsimilarinputs.
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Regularandindependenttestingofprocess,algorithmsandriskprofilingisimportantparticularlytoremoveanysystemic(orindeedsystematic)risk.
Relevanttorobo-advisors,theFOSexplainsitsapproachtodealingwithcomplaints:
• “Wearealreadyusedtodealingwithcomplaintsaboutmanyfinancialproductswherethereisnospecificrequirementinrelationto‘suitability’or‘knowyourcustomers’.Insuchcases−aslongastheyhavenotbeenmisled−weexpectcustomerstoberesponsiblefortheirownchoice”.
• “Weassessanycomplaintwedealwithinvolvingthesaleofa‘stakeholderproduct’ontheunderstandingthatthecustomerreceived‘basicadvice’.Wewillnot,forexample,expecta‘factfind’tohavebeencompleted–ortheadvisortohavemadedetailedenquiriesto‘knowthecustomer’.Aswithotherproducts,wetaketheregulator’srulesandguidanceintoaccount.Wealsolookatgoodindustrypractice”.
• “Simplifiedadvice’processesmustcomplywiththesameregulatoryrequirementsasthoseinvolvingfulladvice–includingtherequirementthattheadvicehastobe‘suitable’.Butinanycomplaintswemightreceive,wewouldjudgetheadviceinthespecificcontextinwhichitwasgiven.Sowewouldnotexpecta‘fullfact-finding’exercise.Butwewouldlookatthequestionsaskedandtheoptionsopentotheparticularcustomerconcerned”.
• “Wherethe‘simplifiedadvice’involvesanautomatedprocess,wewouldlook,aspartofourconsiderationofanycomplaint,atwhethertherewasagoodrecordoftheinformationthecustomergaveandthechoicestheymade”.Whichinfersifthisispresentthenthecomplaintislesslikelytobeupheld.
“Where the ‘simplified advice’ involves an automated process, we would look, as part of our consideration of any complaint, at whether there was a good record of the information the customer gave and the choices they made”.
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5.2 AnAlYSiS oF The Robo RelevAnT ReGulATion
TheInternationalOrganizationofSecuritiesCommissions(IOSCO)isatradebodymadeupofseniorrepresentativesfromthevariousregulatorsaroundtheworld.TheFinancialConductAuthority(FCA)actingheadTraceyMcDermottisinvolved.TheIOSCOcoordinatesandsharesexperiencesregardingrobo-advisors.
Theirrecentpublicationisthe“ReportontheIOSCOSocialMediaandAutomationofAdviceToolsSurveys”.
Thevariousregulatorswhoparticipatedidentifiedanumberofconcernsrelatedtotheuseofautomatedtoolsandthereportsuccinctlydemonstratestheircoordinatedthinking.Theregulatorsareconcernedthat:
• Firmsmaybeclassifyingtheoutputofautomatedadvicetoolsassomethingotherthanarecommendation(e.g.,non-personalpromotionalmaterial)toavoidregulationsortoengageinregulatoryarbitrage;
• Firmsmaynotberegularlyupdatingcustomerinformationusedforasuitabilityanalysistotheextentrequiredbygoodpractice;
• Customersmaynotbeprovidingsufficientinformationfortheautomatedtooltoprovideappropriateresponses(consumersmaybe‘gaming’thesystemorjustactinginignoranceoftherelevanceofprovidingthecorrectanswerforagoodoutcome);
• Customers,potentiallybelievingthattheyhavereceivedadvice,goontobuyriskier,unsuitableproducts;
• Theremaybeconflictsofinterestbetweenafirmanditscustomersresultinginanautomatedtoolpotentiallymakingrecommendationsthatfavorthefirmatitscustomers’expense(e.g.,recommendingproprietaryproducts,churning,favouringpreferredclients);
• Firmsmaylacksufficientinternalcontrolstoadequatelysupervisetheuseofautomatedadvicetools‘inthewild’;
• Whetherfirmsareorarenotprovidingtheircustomerswithsufficientinformation/disclosureabouttheirusingautomatedtools(e.g.,instructionsandriskdisclosures);and
• Whetherfirmsareproperlyapplyingsuitabilityrequirementswhentheyrecommendcomplexorilliquidproductstoretailcustomers.
TheIOSCOmemberregulatorsalsoidentifiedthreeareaswheretheybelieveadditionalguidancefromtheIOSCOwouldbehelpfulinthefuture:
1.Bestpracticesforintermediariesprovidingadviceviaautomatedtools(e.g.,howbesttocomplywithsuitabilityobligations).Thiswouldincludesuchthingsas:
• Thecircumstancesunderwhichtheoutputfromanautomatedtoolonacustomerdirected/execution-onlyplatformshouldbesubjecttotheapplicablesuitabilityobligations(ifpermissibleundertheapplicablelegalframework);
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• Incomplyingwithsuitabilityobligations,howtobestreflectaninvestor’sriskpreferenceinanautomatedtool;
• Whether,andifso,afirmcansatisfyitssuitabilityobligationsbymechanicallymatchingacustomer’srisktolerancewithaproductrating;and
• Can/shouldafirmexecuteatraderecommendedbyanautomatedtool?
2.Whatprinciplesshouldanintermediaryconsiderwhendesigninganautomatedtool?ThiswouldincludesuchthingsasITintegrity,includingrecordkeepinganddatastorage;identitytheftandotherprivacyconcerns;andthetypesofandpotentialrisksassociatedwithautomatedtools,includingthemethodologies/algorithmsthetoolsuse.
3.Whatprinciplesshouldregulatorsconsiderwhenregulatingintermediariesthatuseautomatedtools?Thiswouldincludesuchthingsashowtoimprovecommunicationamongregulatorstoenhancesharingtheirexperiencesinregulatingautomatedtools(e.g.,onlineaccesstoregulators’relevantrules,regulationsandguidelines);identifyingrisksuniquetoprovidingadvicethroughautomatedtoolsthatmayrequiretargetedregulation(e.g.,testingandex-postreviewofrecommendations);andprovidingguidanceonthetypesofandpotentialrisksassociatedwithautomatedtools,includingthemethodologies/algorithmstheyuse.
TheIOSCOreportclearlyhighlightsthattheuseofautomatedadvicetoolsisgrowingaroundtheworld.FinancialintermediariesareusingthesetoolstoassistwiththeirsuitabilityandthevariousKnowYourCustomer(KYC)obligationsputuponthem.TheIOSCOfoundthatwhenfinancialintermediariesmakerecommendations,thevastmajorityoffirmsdosowithrespecttoassetclassesandthatinrespectofspecificproducts,thencollectiveinvestmentschemes,mutualfunds,ETFsandequityclassesarethemostcommonassetclassesrecommended.
TheIOSCOreportdemonstratesthatcurrentlynoregulatorthatrespondedtothesurveyindicatedthatitprohibitstheuseofautomatedadvicetoolsbutitalsohighlightsthatveryfewregulatorshavespecificrulesorguidancerelatedtotheiruse.Rather,mostregulatorsrelyontheirstandarddirectivesongeneralsuitability,disclosure,supervisionandrecordkeepingrules.
IntheUK,theFCAisnoexceptiontothis.TheFCA,however,hasaggregatedthevariousstrandsoftheregulationrelevanttorobo-advisorsintheirrecentpublicationFG15/1:“Clarifyingtheboundariesandexploringthebarrierstomarketdevelopment”(January2015).Thispaperisessentialreadingforthoseconsideringlaunchingarobo-advisorpropositionintheUKorindeedEuropeasrelevantMiFIDisincluded.
TheFCA’sattitudeisthatitrecognizesthat“awell-functioningretailadvicemarketneedsdifferentdeliverymechanismstobefullyeffectiveforthebroadrangeofpotentialinvestors.Therecouldbebenefitsfromawell-designed,low-costmethodofmeetingconsumers’straightforwardinvestmentadviceneeds.Thechallengeistoensurethatsuchmethodswilldelivergoodoutcomesforthoseconsumers”.
Tothatextentandaspreviouslydiscussed,theFCAhasestablishedProjectInnovate.TheauthorhasbeenindiscussionswiththeProjectInnovateteamandwhiletheFCAacknowledgesanumberoforganizationshaveengagedwiththeProjectInnovateteam,therehasnotbeen,atthetimeofwriting,arobo-advisorlaunchintheUK.Weawaitwithbatedbreaththefirstofthese.
TheFCADirectorofPolicyDavidGealehasfurtherstated:“Ahealthyadvicemarketisoneinwhicharangeofdifferentmodelsexistanddeveloptosuittheneedsofabroadspectrumofinvestors.Webelievethat(FinalGuidanceJan2015)willgivefirmstheconfidencetoinnovatetoprovidenew,streamlinedadvisorypropositionswithaclearerunderstandingoftheirresponsibilitiesandofwheretheboundarieslie.”
TheFCAhighlightsthetypesofadvicethatmayberelevantforthoseoperatingrobo-advisormodels.
‘Simplifiedadvice’isnotadefinedtermintheFCAHandbookbuthasbeenadoptedbytheFCAtodescribestreamlinedadviceprocessesthataimtoaddressstraightforwardneedsofconsumers.Itisusedtomeanalimitedformofadviceinthatitisfocusedononeormorespecificneedsanddoesnotinvolveanalysisoftheconsumer’scircumstancesthatarenotdirectlyrelevanttothoseneeds.Theoutcome,therefore,ofasimplifiedadviceprocessmaybeaspecificrecommendation.Thisguidanceistargetedatsimplifiedadviceprocessesthatrecommendretailinvestmentproducts.
Fromaregulatoryperspective,simplifiedadviceisaformof‘restrictedadvice’becauseitdoesnotconsiderallretailinvestmentproductsthatmaybesuitableforconsumers.Soitneedstocomply
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withtherequirementsforrestrictedadvice.TheFCAstatesthatasimplifiedadviceprocessmaybeappropriateforconsumerswhomeetthefollowingcriteria:
• Theyhavetheirpriorityneedsmet,thatis,theydonotneedtoreduceexistingdebt,theyhaveadequateaccesstoliquidcash(i.e.savings),andhaveanycoreprotectionneedsmet;
• Theyhavesomedisposableincomeorcapitalthattheywishtoinvest;and
• Theydonotwantaholisticassessmentoftheirfinancialsituation,butratheradviceonaspecificinvestmentneed.
‘Focusedadvice’isatermthattheFCAhastakenonboardreplacingapreviouslyusedterm‘limitedadvice’.FocusedadviceisalsonotdefinedintheFCAHandbookbutitisusedtodescribeasituationwheretheclientrequeststhatafirmonlygivespersonalrecommendationsrelatingtoaspecificneed,designatedinvestmentorcertainassets.Thereforesimplifiedadvicehassomesimilarcharacteristicstofocusedadviceinthattheadviceprocessisfocusedononeormorespecificneeds.
Thekeydifferencebetween‘focusedadvice’and‘simplifiedadvice’isthatthefocusedadviceinvolvestheclientstipulatingtheboundariesoftheservicetheywishtoreceive.So,withautomated,simplifiedadviceprocesses,thefirmissettingouttheboundariesoftheserviceitprovides.
Aconcernforfirmsmaybethatacustomergoesthroughtheautomatedprocessbutthentransactswithanotherorganizationfollowing(orbasedon)theadvicerecommendedbytheoriginalprocess.TheFCAdealswiththisbystatingthatinrelationtothefirmsgeneralnon-statutoryliabilities(butnotitsliabilityunderCOBSrulesschedule5section138DforbreachoftheCOBSrules),afirmcouldincludeaprovisioninthetermsandconditionsofthesimplifiedadviceprocessthatlimitsitsliabilityorexcludesliability(bothcontractualandintort)ifthecustomerdoesnotbuytheproductrecommendedintheprocessfromtheoriginalfirm.Obviously,theexclusionclausemustcomplywithcommonlawandstatutoryrequirementssuchasthereasonablenesstestundertheUnfairContractTermsAct1977andtheUnfairTermsinCustomerContractsRegulations1999.IntheviewoftheFCA,aprominentandclearexclusionclauseislikelytobeeffectiveinthesecircumstances(althoughthisisultimatelyadecisionforthecourt).
TheFCAhasrestateditsdefinitionsof‘regulatedadvice’,‘personalrecommendation’and‘genericadvice’.UndertheMiFIDdefinition,regulatedadviceisapersonalrecommendationrelatingtooneormorespecificinvestments;otherwiseitisclassifiedgenericadvice.Informationwhichmightbeconstruedasadvicebutnotrelatingtospecificinvestmentsanddeliveredtothegeneralpublicortoexistingcustomersintheformofanewsletterisnotlikelytobeconsideredregulatedadvice.Anexampleofthisisablogonthepotentialupsideinaparticularinvestmentsector.ItisimportanttorememberthattheFCA’sinvestmentsuitabilityrulesonlyapplywhereapersonalrecommendationismade.
Note:executiononlyistechnicallynotadviceandthereforeisoutsideofthisWhitePaperandtherobo-advisorremitasitisaserviceconsistingoftheexecutionand/orreceptionandtransmissionofclientordersrelatingtoparticularfinancialinstrumentsattheclient’sinitiative.Thefirmdoesnotgiveanyadviceoninvestmentsorassessappropriateness.
44
5.3 AnAlYSiS oF Robo RelevAnT MiFiD i AnD ii
TheEUDirectiveMiFIDIIisworthvisitinginrelationtorobo-advice.Itiscomingintoeffect3January2017,andcreatesmoreonerousobligationsintheformofan‘appropriateness’testfor‘non-advisedsales’.Thismeansthatinsomecasesandevenforexecutiononlysales,theadvisorhastoasktheconsumerformoreinformationtohelpitdecidewhethertheconsumerhasthenecessaryknowledgeandexperiencetounderstandtherisksinvolvedinthetransaction.
Thecategoriesof‘non-complex’productswillbenarrowedunderMiFIDIIsothatthe‘appropriateness’testwillapplyevenmoreoften.
Suitabilityrequirementsapplytoadvisedservicesandportfoliomanagement.Therewillbemoreonerousobligationsoninvestmentfirmstodeterminesuitability(includingofbundledpackagesofproducts).Firmsgivinginvestmentadvicewillberequiredtodisclosewhethertheywillprovidetheclientwithanongoingassessmentofsuitabilityoftheproduct.
Periodicreportsmustbeprovidedtoclientsincludinganassessmentofthesuitabilityoftheportfoliounless,inthecaseofinvestmentadvisors,thefirmisnotcarryingoutaperiodicassessmentofsuitability.
Firmsprovidinginvestmentadvicemustprovideclientswithastatementspecifyingthebasisonwhichtheinvestmentrecommendedissuitablefortheclient.
45
SeCTion 6 biblioGRAPhY
AnDReSeARCh linKS
6.1 biblioGRAPhY AnD ReSeARCh linKS
1. http://www.fca.org.uk/static/documents/finalised-guidance/fg15-01.pdf 2. https://www.fca.org.uk/news/guidance-consultations/gc14-03 3. https://www.fca.org.uk/static/documents/guidance-consultations/gc14-03.pdf 4. https://www.fca.org.uk/static/documents/handbook/readers-guide.pdf 5. http://www.fca.org.uk/static/documents/thematic-reviews/tr14-10.pdf 6. http://www.fca.org.uk/your-fca/documents/thematic-reviews/tr14-10 7. http://www.fca.org.uk/your-fca/documents/thematic-reviews/tr14-10 8. https://www.fca.org.uk/firms/firm-types/project-innovate 9. http://www.fca.org.uk/static/pubs/guidance/fg12-10.pdf 10. https://www.fca.org.uk/news/fs14-2-project-innovate-call-for-input-feedback-statement 11. http://www.out-law.com/en/articles/2014/july/fca-seeks-to-clarify-what-constitutes-retail-
investment-advice/ 12. http://www.pinsentmasons.com/en/people/legal-directors--consultants/tobin-ashby/ 13. http://www.professionaladvisor.com/professional-advisor/news/2389862/fca-tweaks-
guidance-on-what-constitutes-advice 14. http://www.esma.europa.eu/system/files/10_294.pdf 15. March2002articlebyRichardJ.Koretoin“FinancialPlanning”magazine,titled“Robo-
advisor:Inanewworldofintense401(k)anxietybroughtaboutbytheEnronfiasco,theonlyhandinvestorsmayhavetoholdmaybedigital.”
16. http://www.businessinsider.com/where-robo-advisorAdvisor-started-2014-9#ixzz3YMPaPAsm
17. http://www.businessinsider.com/robo-advisorsdvisors-grow-quickly-2014-7#ixzz3YMQAMLKs
18. Britonssuffersavingscushionshortage,NationalSavingsandInvestments(26June2011) 19. Mintel,ConsumersandFinancialAdviceUKApril2014 20. http://www.esma.europa.eu/system/files/10_293.pdf 21. http://www.fsa.gov.uk/pubs/guidance/fg11_05.pdf 22. http://www.corporateinsight.com/about-us/in-the-news/3929-robo-advisorsdvisors-now-
manage-over-36-more-money-than-they-did-3-months-ago.html 23. http://www.cassknowledge.com/sites/default/files/article-attachments/the-guidance-gap.pdf 24. http://www.cass.city.ac.uk/__data/assets/pdf_file/0016/202336/The-impact-of-RDR-Cass-
version.pdf 25. https://www.fca.org.uk/static/documents/research/advice-gap-analysis-report.pdf 26. https://medium.com/@tanayj/the-state-of-consumer-fintech-8ae5a1644b5b 27. http://research.prudential.com/view/page/rp/31125?doc=NRRILP&bu=GC&ref=Newsroom
&cid=NewsRelease 28. http://www.ons.gov.uk/ons/rel/rdit2/ict-activity-of-uk-businesses/2012/index.html 29. AutomatedInvestmentAdvisorsGlobalMarketReview2015 30. CorporateInsight(2014),Nextgenerationinvesting:Onlinestartupsandthefutureof
financialadvice,FinalStudyPreview 31. FidelityInvestments(2014),DiggingintoDigitalAdvice:Lessonsfromnewadvicemodels
meanpotentialnewopportunitiesfortraditionaladvisors,Whitepaper. 32. InvestmentNewsResearchinpartnershipwithBlackRock
47
33. http://www.investmentnews.com/article/20150524/free/305249989 34. http://data.investmentnews.com/ria/profile/104510 35. MyPrivateBanking.com. 36. http://techcrunch.com/2015/03/03/wealthfront-now-manages-more-
than-2-billion-in-client-assets/#.2bzwpp:5Saj 37. http://www.iosco.org/library/pubdocs/pdf/IOSCOPD445.pdf 38. http://www.investmentnews.com/article/20150604/FREE/150609958/
pershing-taps-marstone-partnership-to-debut-first-advisor-focused?NLID=daily&NL_issueDate=20150604&utm_source=Daily-20150604&utm_medium=email&utm_campaign=investmentnews&utm_term=text
39. http://www.investmentnews.com/article/20150226/FREE/150229920/envestnet-acquires-tech-company-upside
40. http://www.investmentnews.com/assets/docs/CI99771528.PDF 41. http://www.goldmansachs.com/our-thinking/pages/millennials/ 42. http://www.ey.com/Publication/vwLUAssets/Advice_goes_virtual_in_
asset_management/%24FILE/ey-digital-investment-services.pdf 43. http://www.medscape.com/viewarticle/822956 44. http://invest.events/wp-content/uploads/2015/06/Invest15-Hedges.pdf 45. http://www.moneymarketing.co.uk/lucian-camp-the-d2c-market-is-in-deni
al/?cmpid=pmalert_1321557&sid=MM00003&utm_medium=email&utm_source=newsletter&utm_campaign=mm_daily_news
46. http://www.investmentnews.com/article/20150827/FREE/150829915/in-the-wake-of-BlackRocks-futureadvisor-deal-which-independent-robo?utm_source=Morning-20150828&utm_medium=email&utm_campaign=investmentnews&utm_term=text
47. https://www.kitces.com/blog/pfm-and-account-aggregation-acquisitions-in-advisor-fintech-reaches-a-new-level-as-envestnet-buys-yodlee-for-590m/
48. https://www.kitces.com/blog/BlackRock-acquires-futureadvisor-for-150m-as-yet-another-robo-advisor-pivots-to-become-an-advisor-fintech-solution/
49. http://advisorservices.schwab.com/public/file/P-7751450/Automated_investing_digest_final.pdf
50. http://www.investmentnews.com/article/20150901/BLOG16/150909998/why-a-big-market-decline-wont-kill-the-robo?NLID=daily&NL_issueDate=20150901&utm_source=Daily-20150901&utm_medium=email&utm_campaign=investmentnews&utm_term=text
51. http://m.professionaladvisor.com/professional-advisor/news/2424887/nutmeg-seeks-disrupter-to-lead-advice-expansion?utm_medium=email&utm_term=&utm_content=Nutmeg%20seeks%20%27disrupter%27%20to%20lead%20advice%20expansion&utm_campaign=IFA.PM_Update_RL.EU.A.U&utm_source=PA.DCM.Editors_Updates
52. http://www.businessinsider.com/where-robo-advisor-started-2014-9?IR=T 53. http://www.investmentnews.com/article/20150908/BLOG02/150909932/
now-is-the-time-to-evolve-your-firms-technology?NLID=daily&NL_issueDate=20150908&utm_source=Daily-20150908&utm_medium=email&utm_campaign=investmentnews&utm_term=text
54. http://foxfinancialplanningnetwork.com/robo-shield-whitepaper
48
SeCTion 7 AnAlYSiS oF
inDuSTRY PARTiCiPAnTS
Region Company budget-ing Tool
Financial Planning
education / information
Retirement Planning
and invest-ment Wrap-
pers
Social Me-dia Centre investment Community
Robo-advisor
White label
Capability
Direct invest-ment
without advice
Funds managed and number of
clients accounts
Average account
size
Fee rate for this size of
account
Fee per client
Revenue estimate
Australia BigFuture 4 4 4
Australia Brightday 4
Australia FinaMetrica 4 4 4 4
Australia MOVO 4 4
Australia Pocketbook 4 4 Nil
Australia SelfWealth 4 $240
Australia Stockspot 4 4 0.294% - 0.387%
0 - $77
Canada Nest Wealth 4
Canada Share Owner 4 4 4 $40 per order
Canada Smart Money Investments
4 0.45%
Canada Wealth Bar 4 4 4 4 0.35% - 0.6%
Canada Wealth Simple 4 4 0.35% - 0.5%
Others 8 Securities 4 4
UK fiveraday 4 4 4 around 45 fundsFUM £1.25m
£25 - 30k average 0.79%
UK Hargreaves Lansdown
4 4 4 4 4 4 0.1% - 0.45%
UK Money on Toast 4 4 4
UK Nutmeg 4 4 0.3% - 1.0%
UK Parmenion Interact
4 4
UK Wealth Horizon Powered by Par-menion
UK Wealth Wizard 4 4 4
USA Acorns 4 4 0.25%
USA Angellist 4 4
USA Asset Builder 4 US$616,216,000 in 2,413 client accounts
$255,374 0.43% of AUM
$1,098 $2,649,735
USA Betterment 4 4 4 US$1.3 billion in 72,757 client ac-
counts
$18,868 0.25% AUM $47 $3,431,948
USA Blooom 4 4 4 4 US$26,949,932 in 205 client accounts
$131, 463 $15/month or $180/ year
$180 36,900
USA Covestor 4 US$27,128,583 in 485 accounts
$55, 935 (assuming self-directed
subscrip-tion fees)
at 0.25% of AUM
$140 $67,821
USA Financial Engines
4 4 4 4 US $88.2 billion across 835,107
accounts
$105,615 for professional management
is 0.75% AUM
$792 **
USA Financial Guard 4 4 4 4
USA FinMason 4 4 Nil
USA Future Advisor 4 4 4 4 US$232,124,128 on discretionary basis in
3,460 accounts
$67, 088 0.50% AUM $335 $1,160,622
USA Hedgeable 4 4 4 4 US$2,555,639 in 27 client accounts
$94,653 0.70%AUM $663 $17,889
USA iQuantifi 4 4 4 4 4
USA Jemstep 4 4 4 4 4
USA LearnVest 4 4 4 4 4 4
USA Lift Off 4 4 4 4 4 4
50
Region Company budget-ing Tool
Financial Planning
education / information
Retirement Planning
and invest-ment Wrap-
pers
Social Me-dia Centre investment Community
Robo-advisor
White label
Capability
Direct invest-ment
without advice
Funds managed and number of
clients accounts
Average account
size
Fee rate for this size of
account
Fee per client
Revenue estimate
USA MarketRiders 4 4 4 4 4 4
USA Marstone 4 4 4 4 4
USA Mint 4 4 4 4 4 4
USA Motif Investing 4 4 4
USA Mpower 4 4 4
USA NestEgg Wealth 4 4 4 4
USA Open Folio 4
USA Personal Capital 4 4 4 US$861,759,448 in 6,571 accounts
$131,146 0.89%AUM $1,167 $7,669,667
USA Rebalance IRA 4 4 $225 million across 425 accounts
$529,412 0.5% AUM $2,647 $1,125,001
USA Robinhood 4 4 4
USA Schwab Intel-ligent Portfolios
4 4
USA SheCapital
USA SigFig 4 US$59.5 million across 672 accounts
$88,542 0.5% AUM $443 $297,501
USA StockTwits 4
USA Trade King Advisors
4 4 4 0.25% - 0.50%
USA Upside 4 4
USA Vanguard Personal
Advisor Service
4 4 * 0.30%
USA Wealth Front 4 4 4 US$1,702,872,811 via 21,450 accounts
$79,388 0.25% but fee waiver on first $10k of
assets
$173 $3,720,932
USA Wise Banyan 4 US$20,281,965 via 2,762 accounts
$7,343 (assume customised
portfolio manage-ment) at
0.5%AUM
$37 $101,407
Wider Europe
Cashboard 4 10 % on the previous high-water
mark
Wider Europe
EasyFolio 4 4
Wider Europe
Finance Scout 24
4 4 4 0.5% - 1.25%
Wider Europe
Money Farm 4 4 4 4 4 4
Wider Europe
Money Meets 4 4 Nil
Wider Europe
Quirion 4 0.48%
Wider Europe
Sutor Bank 4
Wider Europe
Swissquote Ep-rivate Banking
4 4 4 0.95% - 1.25%
Wider Europe
True Wealth 4 0.50%
Wider Europe
Vaamo 4 0.49% - 0.99%
Wider Europe
wikifolio 4 4
* Hybrid
51