Ian Peacock, the chief client officer at IG, the UK-based company which provides a trading platform in financial derivatives, says robo-advisors are falling short on inspiring confidence, or investor engagement, regarding its disruptive services’ sector
He continues, “When people consider how to provide for their futures, robo-advice (or more accurately ‘online wealth management’) should play well with audiences that want transparency, professionally managed portfolios and lower fees.
“A combination of efficient technology and investment performance that is frequently comparable or better than old school propositions should be ‘on-trend’, mapping exactly to what investors say they want – and providing an attractive proposition at a competitive price.”
“We believe this nascent industry will take off, but it is still to convince the general public as a mainstream investment option. A nationwide survey conducted for us by YouGov recently found that a scant 23% of investors were confident they could trust a robo-adviser to deliver good investment returns. Alarmingly, this was the lowest of all the options we surveyed; people are, in fact, significantly more confident that traditional IFAs (51%), investment managers (48%), banks (34%), and pension providers (43%) are better placed to generate returns for them.”
“But while people appear to have greater confidence in the likes of banks and IFAs, the majority of investors are not prepared to pay their higher fees. Just over 60 per cent of investors claim that up to 1 per cent would be a fair amount to pay to have their investments professionally managed. But, if you were to add up all the different costs involved in having your wealth managed by a traditional wealth manager, it is almost certain that you’ll be paying more than a percent in charges each year.”
“Nevertheless, while the public appear to lack trust in the service an online wealth manager provides, they are seemingly happy with the underlying tools that robo-advisors frequently use to build their portfolios; 53 per cent of those surveyed believe passive investments such as ETFs and index trackers can deliver good investment returns. It seems that people therefore mistrust the driver, rather than the engineering, when considering an online wealth manager to look after their savings.”
“We know there is a demand for a low-cost alternative to traditional wealth management but what should the online wealth management industry do to earn elusive but vital trust?”
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• First, it must provide genuine leadership when it comes to price transparency
“We should work harder to create an easily comprehensible, industry-wide, guide [as] to what it costs over time to use an investment service – such as adopting clear standards in what an indicator of Total Cost of Ownership (TCO) should look like: MiFID II has helped, but does not go all the way.”
• Second, the industry also needs to be more aware of the negative connotations of “robo” advice
“It is not a service run by robots; just the dealing function is. The online wealth industry is packed full of talented people striving every day to look after their clients and deliver great returns as efficiently as possible. Yet, compared to the traditional investment and advice industry, they are almost invisible.”
“This failure to address these two issues and inspire confidence may also explain the heavy cost of customer recruitment. The robo-advice industry has poured millions into advertising since its boom over the past few years. So much so, that recruiting customers is proving breathtakingly expensive, with estimates showing it costs robo-advisers between £200 and £500* to acquire each new customer. That is quite simply unsustainable for many firms and will, sadly, almost certainly mean that only those with extensive funding and far-sighted shareholders are viable.”
It is not unusual for any new industry to follow a pattern of consolidation after a flurry of offerings has come to market, and I am very confident that those structural themes to save, to take control and to focus on cost will ultimately benefit the online wealth managers.
But in the meantime, damage is being done by this communication failure and the attempt to break investor inertia. However, you choose to define the advice gap it is real and a large proportion of the population is simply ill equipped both from a knowledge and experience perspective to invest successfully without using professional wealth managers.
One way or another robo-advice is the future for less expensive investing. But instead of shouting about our brands at great expense, it’s vital we dedicate our energies to explaining our proposition better. Showcasing the experts responsible for people’s investments and leading the debate when it comes to transparency is a good place to start.
*According to Boring Money
-  All figures, unless otherwise stated, are from YouGov Plc. Total sample size was 2,066 adults. Fieldwork was undertaken between 29th – 31st January 2018. The survey was carried out online. The figures have been weighed and are representative of all UK adults (aged 18 – 59).
-  Investors were defined as aged 18-59 and having any one of the following; Investment Trusts, Spread Bets or CFDs, General Investment Account, Stocks and Shares ISA (including Lifetime ISAs with stocks and shares), SIPP (Self-Invested Personal Pension)