The profitability of robo-advice has been called into question as some banks and providers appear to be stalling on the development of their propositions.
Sources at Hargreaves Lansdown have hinted they are concerned an expansion of its automated advice offering might compromise profits in other parts of the business as customers shift from one offering to another.
Banks’ traction also appears to be slowing, having signalled an early appetite to establish digital advice offerings, with the likes of Lloyds Banking Group still mulling options more than a year after it was first reported to be eyeing the market.
Bank of England governor Mark Carney also warned last week developments in financial technology such as robo-advice will pose a systemic risk if they are not properly monitored by regulators.
In particular, Carney said the technology used by robo-advice firms created a risk of moving significant numbers of clients towards certain assets at the same time, creating volatility and increasing asset prices in the short term.
Can automated advice offerings succeed in the current challenging economic and regulatory environment? And which propositions have a better chance of survival: start-ups, or robo-advisers embedded within large businesses?
Money Marketing approached several banks and providers for an update on the progress of their automated advice propositions.
Hargreaves Lansdown first mooted expanding its robo-advice capability in September 2015. According to a source close to the business, robo-advice is “being looked at closely internally” but profitability concerns remain.
The source says: “The thing is people won’t pay a fee for that advice, even if it’s very, very low-cost; the majority of people who are still serviced see it as too big of a barrier.”
Hargreaves is understood to be concerned clients in its market-leading direct-to-consumer platform Vantage may not be willing or need to transfer away to a guided service and, if they did, it would take business away from another part of the firm that is profitable.
The source adds: “A digitally guided service that’s free, versus an advice service that’s paid for, that’s probably something that’s appropriate for a lot of people.”
Hargreaves is keeping a close watch on the Financial Advice Market Review’s recommendations regarding streamlined and automated advice, and is also reviewing guidance-style tools on its website to help people calculate pension withdrawal rates and allowances.
Hargreaves head of retirement policy Tom McPhail says: “We’re not in a position today to deliver an automated advice service, and I would go as far as to say I don’t anticipate that solution happening in the immediate future.”
Several banks also appear to be stalling their robo-advice plans, including Lloyds.
Reports surfaced in January 2016 that Lloyds was among a number of banks looking to develop an online investment service, but it decided to take stock of the market after the FAMR report was released in March.
Asked last week if plans for the service were still going ahead, a spokesman confirmed the bank was still “looking at it”.
A Royal Bank of Scotland spokesman says plans for a robo-advice offering are still in place but would not comment on when the service will launch. In January last year, RBS said it had temporarily stopped advising customers with less than £500,000 as it developed its proposition.
At that time, the bank said it expected those developments to be finished later in 2016.
Deutsche Bank has also been reportedly developing a robo-service in the UK after its 2015 launch of an automated service in Germany called AnlageFinder.
However, a Deutsche Bank spokesman says: “Deutsche launched the AnlageFinder for its German client base in its home market first. Moreover, we see a lot of interest in the tool from all over Europe. A decision to launch the robo-adviser outside Germany has not been taken yet.”
Other reports suggest Deutsche Bank is still considering launching a robo-advice service elsewhere in Europe in the first half of the year.
One bank actively exploring an advice offering is Barclays, Money Marketing can reveal. It is understood the bank is looking to launch an offering of general financial planning advice and would include both face-to-face and online service.
A Barclays spokesman declined to comment on the new service, but says: “The launch of our new direct investing service at the end of 2016 was the first step towards a suite of new services which will help address the savings and investing knowledge gap in the UK. We are unable to share any further details at this stage.”
Start-ups in danger
As established businesses appear to be questioning their plans, commentators warn “start-up” robo-advisers will face profitability challenges due to the costs associated with attracting new customers.
The Lang Cat consulting director Mike Barrett says: “The advantage for a bank is they have the customers acquired already so the cost of acquisition which is challenging for the start-up model goes away, but that does raise the bar in terms of suitability, responsibilities and things to go wrong. This will be a big year because of the banks and Vanguard coming into the market. The big guys will come in and flex muscles and will have the customers acquired.”
However, he says evidence from the US shows when large established businesses enter the automated advice market, small players can experience a growth boost. Barrett says: “The small businesses essentially surfed the wave of publicity off the back of the large players coming in. It is something we will be watching out for – what the impact will be on the smaller start-ups when the large guys come in.”
Finametrica director Paul Resnik says the next successful wave of robo-advisers will be client retention tools used by larger business – what he calls “enterprise robos” – rather than being based on a client acquisition model – or “entrepreneurial robos”.
He says: “The successful next-generation robo will be designed for financial enterprises. Those enterprises will apply algorithms to directly service low balance clients.”
Resnik believes it is likely to be the start-up robo-advisers that will fail.
He says: “They will be unable to become profitable due the high marketing costs of acquiring clients. Enterprises don’t need their robos to be profitable. The robo earns its keep when it generates assets to manage; diminishes the likelihood of good clients moving to another service provider; services ‘advice gaps’ or clients unprofitable in other channels; provides a foundation to manage legacy products and clients, and de-risks the provision of advice.”
Altus Consulting innovation head Adam Jones
The UK began by looking to the US for its “robo inspiration”, but the market and regulation are so different that transplanting the same business model is not appropriate. Most offerings have ultimately manifested as online, directly sold discretionary fund managers aimed at higher-net- worth clients who had a lot of PR noise but not a lot of traction.
The key gap, however, remains: that of mass-market advice which opened up in the wake of the RDR and offers a rich seam of potential. There are millions of people who have previously not invested outside pensions and employer share schemes, but who need to make more from their money than current interest rates.
Smaller robos have been unwilling to tackle this area as the inherently low margins and high cost of acquisition make profit elusive. In order to succeed, firms will need to be servicing hundreds of thousands of customers, with a focus on smaller, regular contributions, robust automation and straight-through processing. They will also need an incredibly strong brand presence and a very long list of potential customers to market to.
This takes the opportunity away from start-ups and existing advice businesses, and instead places it squarely with retail banks and non-financial services consumer brands. We are likely to see the smarter robo start-ups realise this and pivot to providing white-labelled or enterprise software solutions through brand partners.
The barrier, as always, is the regulation within which advice needs to be delivered, but once a major brand cracks this with a live offering in the market, the others will follow suit rapidly.