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Robo-adviser hits out at Carney ‘attack’ on sector in open letter

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Robo-advice firm Scalable Capital has called comments made by Bank of England Governor Mark Carney that automated advice could make markets more volatile “misinformed” and “throwaway”.

Last week, Carney warned that as a result of “herding” assets, developments in financial technology like robo-advice could pose a systemic risk by acting to reinforce cyclical growth and contraction.

In an open letter to Carney, Scalable Capital chief executive Adam French says that while he was pleased Carney was taking notice of robo-advice, the “attack” on the sector was flawed.

French says: “I am very pleased that Mark Carney has robo-advice on his mind. For him to be speaking about a nascent industry, he must believe that firms using technology to help manage people’s money will grow to become a significant part of the market.

“However, in his speech he appears concerned about robo-advisers becoming a risk to our well-functioning financial system. The argument is that they may lead to excess volatility or increase pro-cyclicality as a result of herding. I see his attack on robo-advice as misinformed for several reasons.”

French says that while the UK’s asset management industry manages £6.9 trillion of assets, European robo-advisers managed only £1bn, “a drop in the ocean” in comparison.

French adds that the robo-advisers can actually help address issues such as closet-trackers that add costs to investors in actively managed funds

He says: “So what’s most important right now? Exposing closet indexers for which clients overpay by £1 billion in unnecessary fees every single year or hit on robo-advisers who advocate for more transparency in investment management, push for lower costs and provide a better service for their clients than traditional products? Who don’t pretend to offer active management while just replicating an index? This is a deep miscalculation of priorities by the Bank of England chief.”

French also hit out at traditional advisers who were also guilty of “herding” by placing clients into standardised portfolios.

“Currently, most retail investors are sold off-the-shelf model portfolios (for example, a portfolio which naively holds 60 per cent equities and 40 per cent bonds) through traditional advice channels. These portfolios suffer from herding and channel many clients into exactly the same positions. Without the use of technology, there is no way to provide truly individualised portfolios that will be adjusted differently in changing market environments.”

“When arguing that robo-advisors may encourage herding, Mark Carney furthermore assumes that all robo-advisors have the exact same investment methodology. This simply isn’t true. It is like saying that all fund managers have exactly the same investment methodology, an assumption he doesn’t seem to be making.”

Concluding that Carney had made “throwaway remarks,” French said Carney was welcome to visit the firm’s offices.

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Comments

There are 3 comments at the moment, we would love to hear your opinion too.

  1. “When arguing that robo-advisors may encourage herding, Mark Carney furthermore assumes that all robo-advisors have the exact same investment methodology. This simply isn’t true. It is like saying that all fund managers have exactly the same investment methodology, an assumption he doesn’t seem to be making.”

    I don’t think that Mr Carney was talking so much about the ‘robo-advisers’ as the customers who may use them – if they all act with ‘one mind’ the effects could be significant for an individual fund for example. It cannot be denied that Markets (i.e. the people behind them) have on occasion displayed a ‘herd’ type mentality as certain investments/assets have become fashionable/popular/successful based on a misplaced understanding or confidence and equally have suddenly and devastatingly gone out of favour and lost value for reasons that are not necessarily justified or real. ‘Bubbles’ can be seen throughout history, and its a brave person who thinks that they couldn’t possibly occur in the future. Any system needs to take this into account.

    When people are making their own individual investment choices (i.e. building their own portfolio of investments from scratch) and are able to action decisions fairly quickly via an on-line portal or platform it’s not beyond the bounds of possibility that at some point there could be an issue with money pouring into, or perhaps more worryingly, out of a particular investment or even asset class very quickly, and I think that this is the concern that Mr Carney alludes to. Behavioural economics recognises that people don’t always act rationally, but also that it’s possible that they might act irrationally at the same time….

  2. …all act irrationally at the same time.

    Apologies.

  3. On occasions it is part of the role of an adviser to point out that now is not a good time to withdraw investments. I have had many conversations with clients in which their starting point is that they have lost money due to a recent drop in market performance and I have countered with “Yes, it might have recently dropped but you are still X number of pounds in profit and this is a long term investment etc etc”

    Individual clients are prone to making irrational decisions on the back of what they perceive the news to be saying, what they think will happen in the future or even what their mate in the pub has said.

    Robo-advice solutions have to be very careful with exactly how they protect clients against their own irrational decisions. Or is the attractiveness of this kind of firm the fact that you don’t have to worry about this because the small print states it is not your problem?

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