Is robo-advice the future of wealth management?

Would you trust an algorithm with your portfolio? Paul Stratford and Sarah Clarricoats from EY talk about robotification

May 27, 2016

Robotification has transformed manufacturing, logistics, and grocery shopping. But is it going to transform investment services? Paul Stratford and Sarah Clarricoats from EY explain how automated financial advisors could make wealth management accessible to the mass market – provided that asset managers overcome four key challenges.

World Finance: Paul – robo-advice. Your working definition is an automated financial advisor, using algorithms to determine and understand client needs, making portfolio management recommendations, with minimal human intervention. Perhaps you could start by just putting that into slightly more practical terms for me.

Paul Stratford: The analogy for robo-advice is a bit like the use of dating sites. So on a dating site it will ask you a number of questions; you answer them, and it then makes some selections and identifies some matches for you. So I think it’s slightly analogous with robo-advice, in that you will be answering questions online about your financial arrangements. It’s going to work out what is important for you, and then make the appropriate selection as far as portfolio and investments are concerned.

Sarah Clarricoats: So, robo-advice is much broader than that. I think what we’ve typically seen in the UK is like simplified discretionary fund management. So, customer-friendly online options that are cost-efficiency and really focused at the mass market. But there are more sophisticated solutions to come, and that we’ve seen in other markets.

So, if you imagine an online solution that aggregates your financial data across your savings, your investments, your pensions; even your partner’s financial status. And then uses an algorithm to create holistic advice based on all of your financial position, and based on your goals and ambitions, your tax status, your investments. I think that’s potential what robo-advice is the future for.

Paul Stratford:…is heading towards. Completely agree, yeah.

World Finance: Okay, so – robotification across industries is largely about reducing costs. How is this going to change the wealth management industry?

Paul Stratford: Robo-advice, essentially being online, reduces some of the human costs out of it. And from a price competitive perspective, that then means it’s targeting a lower price point.

Now, the interesting comparison is that face-to-face advice is expensive. And it’s actually at a price point that the mass market and mass affluent are unwilling to pay for. So actually, that then means robo-advice is incredibly viable, because there’s a market out there that isn’t being serviced at the moment. And this provides them with an opportunity to gain access to financial advice.

Sarah Clarricoats: Exactly. So, the cost efficiency of robo could increase assets under management overall. And that’s why we see, you know, traditional wealth managers, or even the big retail banks, looking to build simplified automated wealth solutions or robo-advisors to capitalise on their existing client base, and move into a younger generation of investors.

World Finance: Like you say we are seeing a lot of people moving to capitalise on this. What is going to be a measured path to success?

Paul Stratford: Well, I think we see four key challenges.

So, the first one of those is for existing providers, there’s potentially a conflict with their existing advisor-led value network. They need to be seriously thinking about, if they’re going to enter this new area, what are the cannibalisation opportunities, and how do they avoid it?

Secondly, they then need to be thinking, what’s the right service model for each client segment? Because robo-advice is hugely valuable, but it doesn’t necessarily mean it’s the panacea for every single client segment.

The third point is around the pace of innovation. So at the moment you need to be thinking about the speed to market. If you kick off a project and it takes five years, inevitably the market’s going to have moved on, so you need to be sharp and focused.

And then finally, a key part of thinking about how to be successful on implementing robo-advice, is getting the business case right. Because there will be pressures to bring prices down. And consequently, you need to have a thoroughly well-thought out value proposition. And it needs to be sufficiently robust that you’ve built in efficiencies, and you can adapt your pricing strategy if there is pricing competition, and you need to lower costs.