In an age in which we trust robots to pilot our planes, diagnose our health and even organise our social lives, might investing our money be an obvious next step?
That’s likely to have been what some of the early robo investment advisers thought. Around 2010, dozens of new market entrants emerged, hoping to provide clients with the opportunity to invest directly with no need for human interaction. Their vision was to move away from a digitised but paper-based product and towards a truly mobile-first one.
The model was simple: a fairly basic suite of products, across a limited number of risk categories were marketed to potential buyers. The idea was that clients would invest directly online in a way that would keep costs for both the provider and client to a minimum. It was a solution tailored to the digital native and a seemingly natural development for an increasingly web and app-centric world.
Quite quickly, however, the pain points became apparent. These new entrants had no track record of being credible financial institutions, and much of the target audience either didn’t have sufficient investable assets or proved hesitant to trust a largely unknown entity with even a small amount of their hard-earned cash.
While account opening and investing was considerably easier and quicker than finding and meeting a financial advisor, no human interaction meant that digital was the only means of communicating with the business. Would there be any obvious recourse if the provider found itself in trouble? Would there be a human to communicate, or even reason with, when account issues arose? And what if this all ended up being a faceless fraud? Potential investors weren’t quite sure, and so the hoped-for onslaught of demand that would disrupt the traditional providers never quite materialised.
Big banks, keen to capitalise on technological innovation, were next to throw their hat into the robo advice ring in an attempt to capture back clients they had lost after closing their financial planning divisions post RDR (Retail Distribution Review). Several launched in-house-built robo services, others partnered with startups and tech companies, but history - predictably - repeated itself. Customers once again missed the comfort of the human option. While many were happy performing simple personal finance-related tasks on their computers or phones - transferring money, checking a balance, or setting up a standing order - they demanded to know that if they needed to speak to a human, they’d have the opportunity to do so.
In the meantime, established investment management firms were targeting their marketing, refining their offerings, streamlining their service and attracting clients that both startups and banks were vying for. In the UK, the two very different models of Hargreaves Lansdown and St. James’s Place became the obvious winners, with differentiated offerings targeted at very specific client needs. And that, it emerged, was the thing customers were looking for.
So robo advisers can’t reflect on a resoundingly successful history so far. But does that mean the future holds nothing for them? Not necessarily. The key lesson we’ve learned from the past decade is that often the first instances of new products and services struggle with adoption. Later, improved and refined versions capitalise on the education the first market entrants created. Perhaps in the next decade customers will become entirely comfortable with a digital-only investment service. However we are not there yet. The value of human contact, particularly when it comes to major financial decisions like mortgages, initial investments or pension drawdowns, shouldn’t be underestimated. We are now seeing banks and robos respond to this demand by moving to ‘hybrid’ models,digital-first services that offer human advice when required. This, for us, is the key. It gives these firms the ability to serve their customers at a level they want and at a price point they are happy with. At times this price point will include a human interaction, others will simply demand a transactional-focused digital-only product.
Some robo advisors have closed their doors, others have merged or been bought out. A small number are proving successful and capturing the bulk of robo assets under administration (AUA), as is the usual ‘winner(s) take all’ trend in any industry that faces technology disruption. This is to be expected. The theory of dominant design has played through again and again in consumer-focused products. Think back to your mobile phone: first there were bricks, then clamshells and finally we settled on the single touch-screen, and now all follow a broadly similar model. A similar product development lifecycle has been followed in the robo advisory space. Those firms that have proved successful are differentiated with a very targeted offering to a very specific customer base. Let’s not forget Hargreaves Lansdown was also just a ‘startup’ in 1981. It took some time before its model of direct sale of fund products became well-established, but it’s now the dominant industry design. For how much longer is yet to be determined.
Director, Wealth Management Consulting, PwC United Kingdom
Tel: +44 7545 236414