There is a digital revolution sweeping through the wealth management sector — so why are so many traditional firms turning their backs on it?
A tiny minority of wealth managers surveyed by Wealth-X this year say they plan to offer robo-advice to their customers, despite an increasing number of nimble, digital upstarts entering the wider market.
So how does it compare? Of course, you don’t actually hand over control of your finances to a robot. The “robo” moniker stems from the fact that algorithms — not an expensive relationship manager — will decide how to structure your investments.
Expensive offices are replaced by digital platforms. Instead of a new client meeting followed by a decent lunch, most robo platforms have some form of online questionnaire to gather data about your finances and risk appetite. This will determine your suitability for a selection of different pro forma investment portfolios, often assembled by using cheap exchange traded funds (ETFs) and passive funds.
Many of the entry-level robo advisers are aimed at the “Henrys” of this world — high earners who are “not rich yet”.
Nutmeg, Wealthify and MoneyFarm have all launched low-cost online wealth management platforms in recent years, designed to scoop up this growing mass affluent market. Nutmeg, for example, keeps costs to a minimum — charging 0.75 on the first £100,000 invested and 0.35 per cent thereafter — by building risk-weighted portfolios with ETFs, which mimic the movements of various indices but at a fraction of the price of mutual funds.
In the past year, many of the established wealth management brands have been developing their own version of these lower-cost services for wealthy customers not yet in the super-rich league.
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Last year, Brewin Dolphin, the FTSE 250 wealth manager, launched a robo-adviser aimed at investors with between £10,000 and £200,000 for a charge of 0.7 per cent of invested assets. And later this year, rival Killik & Co is set to bring out Silo, designed to attract customers who can afford to save as little as £25 per month.
This puts the wealth manager in competition with the high street banks who are also seeking clients at the lower end of the wealth bracket. HSBC, RBS, Barclays, Lloyds and Santander are all moving towards offering some form of robo-advice for their customers.
They have a huge advantage in this market, as the rise of online banking means they have already invested heavily in tech platforms and apps.
One of the first stories I wrote on becoming FT wealth correspondent two years ago looked at how many private banks and wealth managers were poised to launch new web- or mobile-based apps for their wealthy clients. But not all of these have come to fruition — and the pace at which the banks have adapted and improved their own online services means they are still arguably streets ahead. Within the wealth management world, firms who were “born on the internet” are similarly advantaged.
So the next stage in the fast-evolving robo market could well be higher net worth clients switching their allegiance from traditional wealth managers to cheaper robo platforms.
One of the large traditional firms to respond to this potential threat is UBS, which last year launched SmartWealth — part of its attempt to “democratise” wealth management. With a minimum investment of £15,000, it opens the doors far wider to those who lack the £2m needed to access an account at the private bank.
“Is everything moving to robo-advice? Absolutely not,” Dirk Klee, chief operating officer at UBS Wealth Management, tells me. “But there is a need for clients to have access to advisory capabilities, wherever they are and with any digital tool they want.”
This message of “high touch, high tech”, a hybrid service that combines both the personal and the automated, is one that is gaining momentum.
Yet when it comes to robo-advice, many in the industry are adamant: “Clients are looking for relationships built over time,” said one. “They don’t just want to press a button on a computer,” said another.
“The reality is that the wealthy families we work with place as equal importance on service as the investment element of our offering,” says Paul Fletcher at London & Capital. “The fee margin benefit that robo-advice provides is outweighed by the loss of service which clients tend to truly value.”
His point — that wealthy customers want that personal touch — is widely held across the industry. Wealth managers offer a “full service” beyond investment management, providing their clients with tax advice and succession planning, for example, that robo-advisers cannot.
The overwhelming view is that the industry would react if there was demand. But this is where the disconnect between the wealth managers and their potential market becomes more obvious. Survey after survey suggests that customers, particularly the younger generation, want more online services — and that includes automated advice.
Last year, Capgemini questioned more than 5,200 people with at least $1m of investable assets. The consultancy reported that private banks and wealth advisers were facing growing calls from younger clients to beef up their online provision by offering services such as robo-advice, mobile apps and real-time reporting (in volatile markets, the importance of the latter should not be overlooked).
Provide it, the firm warned starkly, otherwise your clients will walk.
Yet the robo-rejecting responses to the Wealth-X survey suggest that most traditional wealth managers want to prioritise their richest and most profitable clients.
For wealth managers, the question now is a simple one: should they invest more in tech, or let the cheaper robos hoover up the lower end of the market — and hope that wealthier clients won’t be tempted to migrate? Whichever option they choose could potentially be costly.
And the wealthy are already using robos. Nutmeg recently took a single £5m investment through its platform. The company “regularly” gets £1m-£2m stakes placed at a time. Why? According to Shaun Port of Nutmeg, the online-only business offers a much cheaper alternative to the fees charged by traditional wealth managers — and the wealthy love a bargain just as much as anyone.
This is not lost on Schroders, the asset management giant, which owns a small stake in Nutmeg. It is possible that we will see more of these allegiances in time, as demand for robo-advice is only going to grow — and across the wealth spectrum, not just for the mass market.
As the wealthy become increasingly tech-savvy, the robo threat is real and growing.