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Ian McKenna: Robo-advice could squeeze out fund groups

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The news that Aberdeen Asset Management is to acquire Parmenion looks a fascinating transaction for many reasons. To me it appears a very smart move.

That an individual asset manager has directly bought a platform is significant in its own right but it is also worth considering the role and the value of Parmenion’s simplified advice business. Over the last 18 months Parmenion has quietly built significant capability in the automated advice space but has done so using an intriguing model.

Rather than launch a direct-to-consumer offering and encouraging consumers to buy without the benefit of advice, Parmenion has built an automated advice tool. Advice firms can white-label the tool and present it to clients as a streamlined advice service which produces a fully regulated advice process and recommendation with a suitability letter.

In recent months, both in the UK and the US, an increasing number of embryonic digital advice businesses have been acquired by institutional owners. After Momentum of South Africa acquired MoneyHub and LV= took a majority stake in Wealth Wizards in June, now Parmenion has been acquired it is hard to think of a significant digital advice proposition in the UK that is independently owned.

Last month’s purchase of Future Advisor by BlackRock for an amount believed to be between $150m and $200m (between £97m and £130m) may look an eye-watering deal for a firm with a mere $600m assets under management. But given how quickly BlackRock will now be able to deliver a powerful automated advice service to its own clients with a total of $4.7trn of assets, this transaction takes on an entirely different complexion.

There is clearly significant and growing interest in robo-advice type propositions. The most recent Capgemini Consulting wealth report in June this year identified that 69.4 per cent of high-net-worth investors under 45 are interested in having a portion of their wealth managed by an automated advisory service.

Aberdeen is getting both an investment platform, which can enable the fund group to build on its relationship with key distribution businesses, together with the automated advice service.

In the UK asset managers have been keen to avoid getting dragged into the advised market, fearful of the potential liabilities that could attach. The Parmenion model delivers a service to advisers which can attract assets but leaves the underlying regulatory responsibility with the advice firm using the white-labelled offering.

This approach has been adopted by many firms, the most high profile of which has been Wealth Horizon but it is far from the only user. Others include Al Rush’s Fiver a day, Thompson & Richardson’s One+one and Hughes Online.

One of the things I like about the Parmenion tool is the way in which it clearly identifies to clients where the information provided does not fit the automated model and guides the client out of the process towards more personal advice.

Looking at how automated advice businesses are emerging in the US, there appears to be a trend that where services are provided by an asset management business most of the funds on offer come from the host organisation with only a few external funds.

If you are going to offer a simple automated advice process do you really need 5,000 or even 500 funds on a platform? Moving forward we are increasingly of the view that asset managers who do not invest in some form of digital distribution, even if they are not themselves providing the advice, will be increasingly squeezed out of the market.

This could have a devastating impact on even the largest asset management businesses. In practice many have already been commoditised by platforms and distanced from distribution. If they do not take the right action urgently digital may cut them off from distribution in a very short period of time. The moves by both Aberdeen and BlackRock suggest they have seen this risk and are moving quickly to address it.

There are many in the UK market who are choosing to believe robo-advice is a purely US phenomenon. This is far from the truth. I have spent a long time studying this subject and even I am shocked by the pace of change. Any asset manager not planning how they will address this market risks losing significant market share.

Ian McKenna is director of Finance & Technology Research Centre

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Comments

There are 2 comments at the moment, we would love to hear your opinion too.

  1. As I said previously:

    Robo advice is to Financial Services what a rubber dolly is to sex. I guess it works and is probably a whole lot cheaper, but would you really want to try it?

    • Ian is spot on.

      If you’re an adviser sheltered in your office cave observing the world through the relatively narrow lens of your personal experience, it may suit you to deride the so-called “Robo-advice” model of investment selection. There is a general recognition that the total cost of ownership needs to fall, allowing for the expected low return environment customers are entering. Snouts need to be removed from the value-chain trough.

      Given the advances in technology over the last 15 years, it’s not a stretch to imagine a world where portfolio ‘assembly’ (versus tax and financial planning) can be delivered by fund groups directly, utilising their own funds and a limited number of external funds, without the need for some intermediary investment ‘expert’ who for the most part borrows asset allocation models from machines/platforms and picks funds from lists built by external researchers. That activity is too easy to automate/replicate.

      Nobody (as far as I know) is suggesting that Financial Planning can be automated. That’s where the value is. But portfolio building? It’s formulaic…

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