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17th April 2018
Professional Adviser

Lester Petch: Fighting 'bionic' robo - a closer look at the new breed

Robos seem to be starting to suspect algorithms alone will not cut it in the advice world, writes Lester Petch, which is bad news for advisers - or at least for those unprepared to adapt to this hybrid world.

Robo-platforms have begun hiring humans to supplement their online offerings and proffer advice. Moneyfarm, Nutmeg, Scalable Capital and Wealthify have all announced they are either looking for human advisers to service their clients or they have already hired them.

This is in addition to the likes of Evester and Wealthsimple, which use the hybrid digital and human approach already. Whether this is a business rescue strategy or has been their intention all along we can only surmise but one things for certain - these operations are coming directly for financial advisers and their clients.

For the majority of robos, hybrid was never the original intended business model. You may suggest they have failed and are having to extend their offering or merely this was the plan all along but, either way, they are right to do so. The client-adviser relationship remains important for great swathes of wealth management clients. According to Accenture, for example, four-fifths (81%) of wealth management clients feel face-to face interaction remains important.

Interacting with clients in times of difficult market conditions, advising them and synthesising different solutions is still a huge element of what is required. It is harder to attract the wealthier and more profitable clients without human reassurance and expertise. The robos have got that and are now going ‘bionic'.

This new hybrid ‘bionic advice' is more likely to be offered at a fixed fee and will be cheaper than traditional financial advice. In fact, it appears robos are willing to offer advice as a loss-leader in order to attract more assets under management - for example, Scalable Capital is offering free initial advice followed by a £200 fixed-fee session with one of its advisers.

The more affluent client has been the traditional preserve of financial advisers but that may be changing with the rise of this new approach. The bionic model now being applied leads to the alarming conclusion there is a very real chance traditional advice firms that do not respond may find their business models under threat in the next five years.

Fighting Back

There is, however, an opportunity for advisers to flip the script and change the game. If robos are now adding humans, advisers need to think about supplementing their offerings with digital automation.

Automated access to actively managed portfolios can be provided at a reasonably low price in some instances - lower than many full robo pricing. In fact, the adoption of an automated service, not only enables advisers to compete with the new bionic robo breed, it also allows them potentially to re-engage with clients possibly lost as a result of the Retail Distribution Review.

So there is still time for advisers to get into the game but they need to move fast - and those who do will potentially have distinct long-term advantages. An adviser's experience coupled with the right digital investment management solution could form a powerful weapon.

Robo in the UK has no real performance history - especially when it comes to ‘black swan' events such as financial crises. Hybrid models are no different in this respect as they too are starting from square one.

The extent of financial advice they can offer is also relatively limited.

Wealthify chief investment officer Michelle Pearce appears to acknowledge this, saying: "We have not seen anyone in the UK effectively integrate holistic financial advice into their robo in a solely digital way. This means human advisers need to be relied on, which is expensive and defies the scalable and cost-effective principle robos live by."

Pearce is right on the costs front. Marketing costs for robos involved in first-time customer acquisition are already high. By adding human advice into the mix, they are set to climb higher.

Robos seem to be beginning to suspect algorithms alone will not cut it in the advice world. This, regrettably, is bad news for advisers, as it makes robos, with their bionic offering almost direct competitors in the same client pool.

Yet all is not lost as financial advisers have a strong head start. They have the talent, the reputation and proof of their good work - in short, a history! They must nonetheless adapt - there is no time to lose in the race for the appropriate hybrid solution, and those without automated options will struggle to retain any dominance as the bionic players spend millions attracting advisers' clients.

Ultimately, the equation is simple: Robo provider + Human adviser = Financial adviser + a digital offering.

Lester Petch is CEO of non-advised investment platform, FinchTech

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