A new term has arrived in the lexicon of names, acronyms and phrases that clutter the landscape in financial services – “Robo-Investing”. You are going to hear a lot more about this over the next few years, as it gathers pace. It sits very comfortably alongside its partner – “Robo-Advice”. Both arrived in the world of financial planning during the last three to five years, as the development of computer applications enabled and automated the types of skills necessary for financial, tax and investment planning. Advice has evolved into complex algorithms that automate the entire process.
In the early days of financial planning, the advisor used to gather a few details about the client, then prepare a report that aimed to provide a suitable financial plan. In the world of investment advice, the same process applied. Details were gathered about a client’s investment objectives, time frame, risk tolerance, and then an investment plan was formulated to meet these specifications.
What failed in both of these cases was the inevitable need for on-going advice and guidance. Circumstances change and clients’ develop different needs. They change their views on what constitutes their personal, acceptable risk. All these can impact the advice previously given, and necessitate re-balancing portfolios. It might also require changing the risk levels of the assets in which the client is invested.
And if these issues were not complicated enough already, governments and their regulators are imposing changes to the way the financial advice industry is remunerated, such that commissions or other related incentives are banned. In the US, whilst there is no ban on commissions, the industry has become a “household utility” with many thousands of providers, resulting in highly competitive fees and consequently a drive to increase the quality of advice.
“Robo-Investing” enables new participants an opportunity to gain a better understanding of the proposition on offer to end-investors. In both the US and UK, a number of automated investing services have developed in the last few years. Each of them feature their own idiosyncrasies, but ultimately they seek to deliver the same longer-term objective: automated investment advice at a low cost.
The services vary in the scope of the services provided:
- Fully automated discretionary or non-discretionary investment
- Self-selected investment advice
- Guided investment advice
Below is a table to provide a simple overview of the range of services, products fees and charges that typically occur within the wealth management space. It compares the traditional landscape with the developing digital landscape for robo-investing and advice. This is based on extensive work done on the subject by the consulting firm EY.
To start “robo-investing” clients are required to give information into an application interface, various details about themselves, their investment objectives, time frame, experience and sometimes their other portfolios. Then, the client is directed to one of a number of standard portfolios, on a closest fit basis. Take it or leave it! Thereafter, once on-boarded to the program, the client/investor becomes immediately invested according to the pre-determined portfolio, which is managed by the system. As an online platform, regular reports and other related information can be accessed instantly. To ensure simplicity and low costs, Exchange Traded Funds (ETFs) are the product most often used, as they can be traded instantly via the listing on stock exchanges, should changes need to be made.
There are some clear limitations. Not all clients are willing to forego personalized service. Many might feel that they do not possess adequate technology skills. There is no doubt personal financial planning and investment advice does need to be tailored to the needs of the individual client. Being asked to fit the box, which defines robo-investing, doesn’t suit everyone. This type of investment management is still very new. Longer term performance results that give meaningful comparisons are not yet available. But there are many people willing to try something new. Often the best way to use this approach is alongside the more traditional advisory services that have been personalized to the needs of a client. If it doesn’t work, clients can still personally deal with their trusted advisor.
For clients, the main concern will be whether robo-investing achieves a better return compared to traditional advisory services. Advisors face a new challenge to make better investment selections that achieve outperformance. The emergence of robo-investing provides a higher degree of competition in the investment advisory industry, which can only be good for clients.