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1st November 2017
Professional Adviser

What does the future look like for robo-advice?

For all the hype around robo-advice, writes Lester Petch, it is worth asking whether it will truly revolutionise financial advice or simply entrench the market position of those with deeper pockets and established distribution.

Excitement around robo-advice is, understandably enough, drowning out scepticism - after all, global behemoths such as Citigroup have estimated assets managed by these platforms could reach an overall value of $5 trillion (£3.77 trillion) over the next decade.

For all the hype around this technology, however, it is worth asking whether the robo expansion will truly revolutionise financial advice - or could it simply entrench the market position of those with deeper pockets and established distribution lines?

To move out of obscurity, robo-advice platforms currently rely heavily on marketing for initial users and revenue. This is has proved to be an expensive tactic. Nutmeg appears to have spent £10m on promotional and staff costs in the last financial year, contributing to an overall pre-tax loss of £9m.

Moneyfarm recently posted an operational loss of £6.4m with a significant chunk (£2m) spent on marketing. The current equation on client cost of acquisition versus lifetime value does not stack up but robo-advisers are betting that, over time, the balance will shift and winners will emerge.

With the number of market participants multiplying, however, this might be a risky assumption. A recent FAMR report suggested around 100 of these platforms are close to launch across a wide range of services and target markets. With heavy competition and distribution channels largely unbuilt, a robo-advisory firm runs the risk of failure before it ever becomes sustainable.

Nor do the complications end there. Some robo-advisory platforms use somewhat sophisticated but unproven algorithms that have yet to be really tested in times of financial volatility. With respect, back-testing is no substitute for performance history, and algorithms can and have got it wrong in history.

As can also happen in general advisory businesses, robo platforms seem to have potentially divergent ideas about suitability and risk tolerance: There does not seem to be a consistent approach to ensure that risk-profiling investors as ‘cautious', ‘balanced' and/or ‘adventurous' leads to consistent outcomes across the different robo providers.

So Where Next?

For all its issues, the robo market is evolving and there will be long-term winners. As we enter ‘Robo 2.0', deep pocketed players will continue to spend to win - knowing that user numbers need to grow to ensure they can sell to a willing bidder when the time is right.

Niche players will emerge meanwhile to address underserved market segments and banks will undoubtedly strengthen their robo positions. They have the natural and well-established distribution channels.

Unlike online banking, however, which saw the first wave of fintech pioneers wiped out when the banks got involved, mistrust - regrettably accrued through multiple banking scandals - should ensure that, this time around, some smaller independent robo entities still have a seat at the table.

Slightly longer term, ‘Robo 3.0' will likely see the emergence of big data giants - perhaps the Amazons and Googles of this world - distributing a robo advice service laser targeted on events and stages in a retail investor's life by leveraging the eye-watering amounts of data they have on them as individuals.

This, however, is conjecture. At present, the suitability and advice issues embedded in these platforms remain untested as relative market tranquillity prevails. Only time will tell whether the issues that Robo 1.0 and 2.0 are yet to resolve will cause an industry wide review.

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