Can robots really take over from face-to-face advisers?

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The robo-advice market looks set to explode in the UK, with investment giant BlackRock and Hargreaves Lansdown among the firms developing low-cost offerings to plug the post-RDR advice gap.

However, it remains unclear exactly how the growing market for technology-driven solutions will interact with traditional face-to-face advice.

Will robo-advice complement advisers’ existing propositions, or does it pose a threat to the industry? And can automated investment tools adequately respond to investors’ changing needs and risk profiles?

Talking point

The idea of robo-advice centres on the use of algorithms to design investment portfolios based on questions clients answer online.

This should, in theory, allow firms to deliver advice to more people at a significantly lower unit cost.

According to Boston researcher Aite Group, the value of assets managed in this way will more than triple to $60bn (£39bn) in 2015 from about $16bn (£10bn) at the start of 2014.

Platforum head of direct Jeremy Fawcett says robo-advice is “the talking point” at the moment, transcending both advised and DIY investing.

He says there are two schools of thought emerging on robo-advice: those who argue it will replace traditional advice; and those who believe it will be complementary.

Fawcett says: “You’ve got people moving in different directions. You have Nutmeg as an attractive, consumer-facing firm and then you have big brands like Investec and Brewin Dolphin also pushing into the robo-advice space.”

In its preliminary results to the year ending 30 June, published earlier this month, Hargreaves revealed it is looking to further develop its automated advice proposition.

Following the launch of its Portfolio + multi-manager service in June, Hargreaves said it will consider “further expanding our stable of simple online investing tools, sometimes referred to as ‘robo-advice’.”

Hargreaves Lansdown head of financial planning Danny Cox says: “What we are looking to do is help people make decisions about their investments. We don’t see it as a replacement for people making their own decision on a non-advised basis.

“We are looking at how we can use other similar technology-based processes to help people with their decisions but whether that is going to be advice in the true sense of the word or not, I don’t know.”

Giant investment manager BlackRock also entered the robo-advice space this month following the acquisition of US digital wealth management firm FutureAdvisor.

FutureAdvisor will operate as a standalone business unit within BlackRock, but instead of targeting individual investors, it will allow banks, insurers, brokers and advice firms to white label the service.

BlackRock says “over time” it expects to expand the platform to clients globally, including in the UK.

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“The digital advice space is one we’ve been watching for a long time,” says BlackRock director of corporate communications Jessica Greaney.

“As demand for digital wealth management grows, the combined offering of BlackRock and FutureAdvisor will accelerate our B2B financial adviser partner firms’ abilities to serve the mass affluent in a convenient and scalable way.”

The US is leading the robo-advice march, with Vanguard unveiling its Personal Advisor Services proposition targeting retirees in May. And last year, Fidelity also partnered with robo-advice firm Betterment to create model portfolios based on Vanguard’s funds.

Limits

Parmenion Capital Markets corporate communication manager Nicola Robinson says the firm’s automated advice tool Interact will never become a robo-advice service. Parmenion was recently acquired by Aberdeen Asset Management.

She says: “We always deal with a client through an adviser as we think it is potentially dangerous not having an adviser there.”

Others argue the existing robo-advice offerings remain limited, particularly when it comes to tax and estate planning.

Tilney Bestinvest managing director Jason Hollands says: “A proper advice process means to identify the full context of the client’s circumstances. It is difficult for a set of algorithms to give a real holistic picture of one’s risks and preferences.”

Tilney Bestinvest has launched a series of ready-made portfolios for investors.

The Financial Times reports the service is being offered to those with £100 or more to invest. It will suggest portfolios made up of 20 underlying funds which will be regularly rebalanced.

Infancy

Although they have the potential to fill the UK’s advice gap, experts say the robo-advice sector remains in its infancy.

Yellowtail Financial Planning managing director Dennis Hall says Vanguard’s US robo-advice offering, which charges investors just 0.3 per cent annually, could shake up the UK market.

He says: “Vanguard offers its automated advisory solution at an incredibly low rate. If they come over to the UK and do something similar we’ll see some real price compression in the execution-only space, especially on firms such as Hargreaves or Tilney Bestinvest whose costs for their platforms are considerably higher.”

Jonathan Davies Wealth Management managing director Jonathan Davies adds: “Robo-advisers seem fine when the investment philosophy is simple. The problem is what happens when investment conditions radically change.

“Form a private investor point of view, robo-advisers will do well for certain periods of the investment cycle, but not on a long term investment strategy.

“The problem is when investment condition shift. I think I would want to stick with a real person with a real brain.”