Robo-advice momentum has stalled: will the much-hyped digital revolution ever take off?

Good financial advice is still needed. Jeff Salway examines how the market will evolve.

Five years ago, it seemed the future of financial advice had arrived – and it came in the shape of robots and algorithms. With regulators anxious about a financial advice ‘gap’, technological advance paving the way for innovation, and the pension freedoms creating a new wave of demand for help with retirement investments, the time seemed right for automated investment advice to take off.

The first notable UK provider arrived in 2011, in the form of Nutmeg, but it was from 2015 that the launches came thick and fast. The likes of Fiver a Day, Money on Toast, Moola, Wealthify, Wealth Horizon, Moneyfarm, Wealth Wizards and UBS Smart Wealth made for an increasingly competitive market. Bigger names later joined the action, including high street banks, while Aegon and LV= were among the providers introducing online services for the retirement income market.

With the Financial Conduct Authority (FCA) supporting the sector through initiatives such as Project Innovate, it seemed robo-advice was here to stay.

Then momentum stalled. The launches slowed and providers began to exit, including UBS SmartWealth, Investec Click & Invest, Fiver a Day, Tiller Investments and, in February 2020, Moola. So what happened to the much-hyped digital revolution that promised to bridge the advice gap and make investing more accessible and appealing?

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The bottom line

Robo-advice refers broadly to automated, direct-to-consumer advice and guidance, with investment recommendations generated by algorithms.

At its simplest, investors can go online, complete various questionnaires and allow the system to map their risk appetite and goals to a suitable portfolio, typically made up of low-cost passive investments such as exchange traded funds (ETFs).

But profitability is the stumbling block. It “remains the biggest challenge for robo-advisors, with many having failed to gather significant assets under management”, according to US-based asset manager Cerulli Associates. It published research earlier this year showing that fewer than half of European asset managers plan to launch robo-advice services in the next 12 to 24 months.

The cost of attracting clients has proved particularly daunting, especially when added to the expense of establishing and marketing propositions in a busy marketplace. Client acquisition costs range between £200 and £500 per customer, according to Boring Money. But a combination of low fees and investor portfolios that are often small by advice market standards – typically around £20,000 to £40,000 – means firms need a large number of customers if they are to make a profit.

“While robo-advice is undoubtedly a sound idea, it remains to be seen whether any firm can actually make money from offering such services,” says Justin Modray, director of Candid Financial Advice. “Nutmeg, arguably the best-known robo-adviser, lost £18.5 million in its year ending 2018, and I struggle to see how it will ever turn a profit unless it massively culls its costs.”

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Demand and supply

Research last year by the FCA found little consumer appetite for robo-advice as we currently know it, with the biggest resistance among those most likely to benefit. “People generally want to be told what to do and want the comfort of having someone to speak to if they need it,” observes Anthony Morrow, chief executive at OpenMoney, a digital financial advice service.

“Most robos don’t do that. DIY platforms are great for that part of the population confident making their own decisions, but that is a small part of the population.”

Robo services operate in a landscape where those able and willing to take full financial advice will seek the conventional face-to-face route, while investors happy to do it themselves can opt for investment platforms and fund supermarkets. There’s a large middle ground too, comprising those comfortable using online tools to research portfolios but less  so when it comes to investing and managing those portfolios.

Many of the initial automated services were more like guided investment sales than actual advice, with little attention paid to factors such as circumstances, tax status or investment objectives. However, there has since been a gradual shift towards digital services providing regulated financial advice (and which therefore offer the added benefit of recourse to the Financial Ombudsman Service and the Financial Services Compensation Scheme if things go wrong).

The biggest issue with the basic robo-advice model is that very few offer actual advice, reckons Modray. “There is no financial planning advice involved, nor help assessing whether transferring investments or pensions from another provider might be worthwhile,” he explains. “This means the core market tends to be those investing small sums which, given the amount robo-advisers appear to spend acquiring new clients, simply isn’t profitable.” Basic investment guidance services also operate in isolation from other financial needs.

In reality, however, investing is only suitable for a relatively small proportion of the adult population. “The majority of the population should be looking to pay off debt and/or build up short-term (cash) buffers before considering an investment,” says Mike Barrett, consulting director at Lang Cat Financial. “The robo services that provide regulated advice will assess this as part of their fact-finding process.”

The perfect blend?

In other words, the market may be heading towards a hybrid model that blends digital and human input. That might involve the initial part of the journey taking place online, with human interaction if there are additional questions or more complex matters to consider.

“There is a demand for financial advice, so how that is delivered is secondary to the primary need,” according to Morrow.  “If advice can be delivered through technology, then it will be.”

While some online services are increasing the human element of their proposition, traditional advisory models are looking at technology as a way of reducing their costs and, in the process, lowering the cost of advice. Many expect the robo model to evolve to a point where low-cost financial advisers are offering personalised advice remotely, online and/ or by phone. This would be particularly relevant to the growing at-retirement market, where investors face often complex decisions about pension income.

A growing number of digital services are already evolving towards these sort of hybrid services, and the likes of Vanguard and Fidelity have had some success in the US with propositions that combine human and digital advice.

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The next generation

The lessons from the past five years are there to be learned, says Modray. “The main obstacles to successful new entrants are the tech-based robo-advisers generally not understanding the financial advice market, and traditional financial advisers being reluctant to risk cutting their fees and embracing a more remote-based service.”

He expects the market to evolve over the next five years, with an opportunity to be taken by firms able to provide full financial planning and investment advice remotely at a reasonable cost.

The potential for robo-advice is there, as is the appetite for innovation. The capital provided by the likes of Schroders and LV=, which back Nutmeg and Wealthify respectively, suggests as much.

Whether it’s hybrid advice or a model that has yet to emerge, digital advice is here to stay.

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Robo advice in numbers

754,000: Estimated number of active users in the UK in 2020*.

£25,091: Average UK robo-advice assets under management in 2020*.

Profit per client: The minority that disclose a figure report a loss per client, ranging from £14 to £300‡.

£18.9m: Total UK robo-advice assets under management in 2020 (US – £814.1m)*.

Number of clients: Most firms don’t disclose. Among those that do, it ranges from around 40,000 (Moneyfarm) and 60,000+ (Nutmeg) to 200,000+ (Wealthsimple) and 350,000 (Moneybox)‡.

£37,830: Predicted UK average AUM in 2023*.

£46.3 million: Predicted UK robo-advice AUM in 2023*.

40: the average age of UK robo-advice clients.†

Notes: *https://www.statista.com/outlook/337/156/robo-advisors/united-kingdom?currency=gbp
† https://www.moneymarketing.co.uk/news/robos-firms-assets-and-customer-numbers-creep-up/
‡ https://blueprint.moneymarketing.co.uk/the-state-of-the-robo-advice-nation/index.html