Wealth managers’ mixed feelings over impact of robo-advisers on the industry

Wealth managers are divided over the impact of robo-advice on their business, according to a poll carried out by Vanguard at their inaugural wealth management conference. The survey of 70 UK-based managers found 40 per cent saw robo-advice as a way to bring greater efficiency to their business, as well as attracting new clients. Meanwhile, 40 per cent saw this new development as a threat. Seven per cent believed there would be no impact and 15 per cent had yet to form an opinion.

“Robo-advice and the digital revolution is absolutely the big topic for wealth managers,” says Janine Menasakanian, head of wealth for Vanguard’s UK business, adding that firms are looking at different ways of implementing the digital capability that exists. While some managers see digital technology as a way of attracting a younger generation of clients, others are not looking at it as a direct to investor distribution approach, she says.

“Some are looking at creating a business to business to consumer type model and are getting quite a lot of flows through intermediaries recommending their products. They are not necessarily going straight after the investor. But others are looking at capturing that new generation, that growing wealth. It depends on the firm’s strategy as to how they use digital.”

Yet some wealth managers are definitely burying their heads in the sand, warns Ms Menasakanian. “We do come across dinosaurs who are either at the very start of their journeys or haven’t considered it yet. They might say ‘our model works, it has always worked, why should we change it?’”

Upgrading technology can be expensive and many firms are incorporating a digital strategy into wider system upgrades. “MiFID II has provided an impetus to some of the more progressive firms to look at their systems generally,” she says. “What we have found is those firms who are already looking at systems updates which MiFID II has instigated, are also then saying OK, how can we then be more efficient when dealing with our clients. They are tagging it onto that wider project.”

A digital footprint can also provide a way for wealth managers to mark themselves out from their competition, believes Ms Menasakanian. “There is so little to distinguish one wealth manager from another. They will say their investment management service is what makes them stand out from their competitors, their intellectual property, but to be honest that has been commoditised. And clients don’t really care how their wealth manager puts together their portfolio as long as it provides returns and helps them meet their goals. And so the digital world allows them a degree of personalisation and differentiation.”

There is no question that digital advice represents a massive opportunity, says Nick Hungerford, founder of the online investment company, Nutmeg. “Robo-advice will reduce the costs for the consumer, and make expert financial planning available to millions of people who can't currently afford it.”

It is a competition threat to those companies that refuse to embrace it, he admits. “But let's remember this isn't about how threatened the industry feels by innovation - it's about how well the customer is served.”

Robo-advice offers three principal benefits to the consumer, says Andrew Arwas, UK head of wealth management and banking services, at Capco, the global business and technology consultancy dedicated solely to the financial services industry.

“Firstly, it enables a service that is available everywhere at any time – through digital or mobile devices. Secondly, it offers a fast and simple route to an investment solution for the consumer. The solution can be generated in a handful of minutes. Finally, it offers the potential to bring down fees substantially by relying on highly scalable technology solutions.”

But it would be fair to say that, so far in the UK, much of this is still promise and potential and not yet reality, he explains. “While the early entrants into robo-advice offer these benefits to their customers, the level of uptake and usage is still relatively low. We would expect to see many more offerings in 2016, especially from more established names, and with that scale the benefits will have greater impact across the market.”

Both Mr Arwas and Vanguard’s Ms Menasakanian believe that robo-advice is in its infancy, especially outside of the US. So who are likely to emerge as the leaders in this field?

“Our research indicates that the brand heritage of a wealth manager is highly significant for the majority of investors looking to invest their money,” says Mr Arwas. While new entrants are able to win the assets of some consumers for whom there is still antipathy and distrust of the big global banks, many consumers still take comfort in the longevity of these established players, he adds.

But what about the possibility of tech giants getting in on the act?

“Apple and Google have the existing customer base, so could overcome the challenges that some start-ups face,” says Ms Menasakanian. A trusted brand is one of the biggest criteria for people choosing a financial services provider, she explains, and start-ups have to advertise heavily to get brand recognition. “But the reason why the wealth management community does not see the tech giants as a threat – they do talk about it but they don’t see them as a threat – is they recognise the hurdles that you have to jump through to get regulated. And they feel, maybe naively, that those types of companies would not have the will to be distracted by being regulated.”