As has been the case for as long as I can remember, the charges debate rumbles on. Fund groups talk about adviser charges, advisers talk about platform charges, robo-providers talk about everyone’s charges and Paul Lewis continues his rhetoric on wealth destruction (which seems to centre on him being completely at a loss as to why any of us charge anything at all).
But it is the robo bit I want to come back to. Yes, this is a pretty unhelpful, catch-all phrase that is up for debate but let’s bear with it for the purpose of this article.
The US has led the way so far, managing to attract a large amount of assets from a large number of investors. Initial, second and third round funding has been secured by many new entrants and things have seemed pretty rosy.
At the same time, dire predictions have been levelled at the traditional face-to-face advisers, based on the inevitable fee compression they will face due to this digital competition.
Many of the leading management consultancies supported this view and predicted the plethora of UK start-ups could compete in the same way. However, digging into some of the numbers of the bigger players in the US, it appears things are not going quite as well as originally envisaged.
Two of the largest – Betterment and Wealthfront – have amassed around $2.9bn each in a very short period of time. Great news for them, you might think. But this is only delivering revenues of around $7m each if The Economist is to be believed. This is barely enough to sustain around 100 staff, let alone their huge ongoing marketing budgets.
So while they have achieved scale in client numbers, with each new client bringing in fresh revenue, it is from small invested sums. This means that, to break even and turn a decent profit, it will take years – perhaps many years – to recoup the hundreds of millions of dollars poured in by the venture capitalists.
This problem is being is compounded by a marked slowdown in asset attraction. The early adopters keen to try the service have now done so and the difficulties in attracting further investors is emerging.
This has led to a raising of prices, with some of the more successful providers such as Betterment increasing its fees for some services to 0.5 per cent per annum.
It is also adding human-based advice to its proposition, suggesting it is dawning that there remains a demand for human counsel around financial decision making.
As was always bound to happen, incumbent wealth managers in the UK have upped their game digitally to protect their businesses. However, US-based Charles Schwab and Vanguard have publicly stated the pure robo-advice model so prevalent on their home shores could not work here due to regulatory constraints.
So for all the talk of robots and the exponential growth in technology, issues of scale, investment size, regulation and lack of human interaction mean there is a long way for this yet to go in the UK. Interesting times indeed.
Lee Robertson is chief executive of Investment Quorum