‘All Roads are Leading to Retail’: Quantum Leap Forward for Digital Investment Management

 

Delegates at the well attended Robo-investing Europe 2017 conference in London’s Canary Wharf witnessed the metamorphosis of an industry; digital wealth management ceased to be the preserve of a few hardy pioneers, and came to the fore as a transformational force that will not only revolutionise wealth management, but also impact on so many other aspects of our lives.

 

In addition to the proliferation of start-ups pledged to democratise investment and empower a whole new generation to take control of their financial future, robo-technology is now having a profound effect on wealth managers as banks and institutions seek to leverage their strong brand awareness and huge reach.

Traditional boundaries are becoming blurred as a new breed of advisers become the fleshy front end for algo-driven portfolios, traditional wealth managers seek to secure their future business by reaching out with ‘incubator’ services and banks seek to re-enter the advice space with digital solutions of their own.

The supportive regulatory environment and a dynamic fintech sector, that seemingly has little problem in raising capital, points to an exciting future – artificial intelligence (AI) offers the potential to ‘understand’ you and deliver appropriate financial support in pursuit of your goals and the looming presence of behemoths such as Google and Amazon, armed with the data they have collected about you suggest that the future may look very different to the past.

With the development of the underlying technology seemingly in hand, the challenge appears to be that of customer engagement and the establishment of multi-channel distribution models.

Keynote speaker Devie Mohan from Burnmark – ‘fintech research that’s fun’ lit the blue touch paper by describing the large number of distribution deals and partnerships that have recently been struck and handed over to Andrew Power of Deloitte (below) who summarised developments since he last addressed conference in May 2016.

Andrew told us that there were now 64 robo solutions live in Europe with around 100 in development; he described a large market, with intense competition but questioned the viability of standalone propositions because of the high cost of customer acquisition – he believes that incumbents have the advantage.

He said that with 5m people in the advice gap there was a big opportunity for robos, but that competition would be fierce and that margins across the wealth chain will be eroded.

‘with 5m people in the advice gap there is a big opportunity for robos’

With the AUM required to break even estimated to be £3bn (Nutmeg, the UK’s largest, currently has £500m) Andrew believes that our experience will be similar to the US where Schwab and Vanguard quickly built dominant positions by leveraging their large customer bases.

He defined the requirements for success as being – creating a strong brand and customer acquisition; high customer engagement; scalable operating costs and simplicity.

Andrew looked at the emerging distribution channels with banks developing robo to re-enter the advice arena, the auto-enrolled seeking better investment performance and IFAs offering a hybrid service with robo for everyday advice and face to face for bespoke requirements.

A recurring theme for the day was multi-channel distribution ranging from D2C through B2B to institutional adoption; Andrew weighed the prospects for incumbents such as banks with strong brand recognition and large numbers of customers against the cutting edge, nimble new kids on the block and concluded that the prospects for the former were brightest.

In the bigger picture he believes that margins for asset managers would decline, that there would be fewer of them and that education would be a key driver to improving customer engagement.

Next up was a panel session entitled Building a Digital Wealth Proposition highlighting five very different approaches and perspectives.

David Bower of Invesco Perpetual explained how investing in ETFs removed the ‘friction’ from self-select investing and Phil Blows described how Wealth Wizards targets the niche, not to mention complex, area of pensions and ‘at retirement’ planning delivered as an employee benefit. He said that because a process that previously took eight hours with an adviser could now be completed in 8 seconds, a challenge was to maintain the perception of value.

Shane Williams said that UBS had started by identifying customer ‘pains’ rather than just converting legacy business when designing SmartWealth, which launches imminently. UBS plans to deliver regulated advice to time poor professionals and believes that its existing brand, asset management capability and large customer base will be key to its success – Mr Williams described ‘the fintech inside’.

Martin Stead of Nutmeg confirmed its commitment to democratise investment by always putting the customer first and described a friction free, digital and increasingly mobile, experience.

With four years of returns to report, Nutmeg’s ten model portfolios have added between 6.5% and 47% in the lifetime of the company, making it a top quartile performer net of fees. Nutmeg targets an ‘ignored middle’ comprising 10m people with its customers dividing equally between first time investors and those moving from managed or self-directed services.

This is a mass market brand adopting an FMCG approach to target peer groups with what could be a family of branded ‘Nutmegs’, with human support always available to make customers ‘feel good’ about their future.

‘the future will be about goal based investing rather than ‘products’

The panel agreed that the future would be about goal based investing rather than ‘products’ with the overall ambition to chip away at the chronic savings gap and poor retirement provision that exists, accepting that some short term pain may be the catalyst.

Future propositions are likely to be more complex, delivering a combination of active and passive investments, as well as the ability to evolve over time; David said that customers don’t want to ‘look under the bonnet’ they just want their investments to ‘work’ – i.e. achieve their goals.

Next up Jane Walshe of Enforcd and Alan Miller of SCM Direct looked at Regulation and Financial Services Innovation and gave an enlightening perspective of what will be expected of the robos in light of MiFID II legislation.

Jane talked of the gathering storm in wealth management as companies are required to add up all applicable charges and customers realise that the headline ‘1%’ fee is only one of a range of charges that may nibble 3% p.a. from an investment; this should provide a big opportunity for the robos.

She also raised questions regarding the commercial viability of robo-advisers, saying that the £3bn ‘threshold’ was based upon an average portfolio size of £35k with charges levied at 0.75%; the reality is that fees are reducing and the average portfolio lies somewhere between £3.5k and £12k

She also scotched the myth that tech-savvy millennials were the lifeblood of the robos, saying that they actually only account for 5% of their customers, with the majority being far more mature.

It was declared vital that robos offer very simple, totally transparent fees – delivering MiFID’s ‘all in fee’ should be a core part of robo’s strategy, but not all have passed the simplicity test to date.

Alan said that robo-advice, or ‘online discretionary portfolio management’ as he preferred,  would not exist in isolation, but may form part of a relationship that we have with a company such as Amazon, and that AI could lead to great opportunities.

He said that having a good brand was all important and that those with a big brand, or doing something better/different/cheaper were likely to prevail; he too warned of the high cost of digital marketing and customer acquisition.

In introducing a panel on Modern Customer Engagement Anna Lane explained how The Wisdom Council road tested customer propositions of a whole range of solutions, looking at their overall appeal and how easy they were to understand, concluding that one size most certainly does not fit all, and that some robo-advisers were just too complex.

‘low financial awareness and mistrust of financial services is a problem when targeting millennials’

She said that for robo to become a mass market proposition, financial literacy is critical and that trust in a brand is key; she identified low financial awareness and mistrust of financial services as a problem when targeting millennials.

Anna said that strong brands with good online functionality could pose a threat to banks, particularly if they avoid jargon and use social media techniques such as ‘likes’ and ‘shares’ to engage with the next generation.

She identified the points at which would-be customers ‘drop out’ of the sign up process and believes that women in particular have a low level of financial engagement; over-egged T&Cs are a particular turn off and primarily designed to protect the company.

Maria Garcia said that BBVA started by asking how they can help customers make decisions and use core data and a simple user experience to engage with them.

Richard Theo of Wealthify said that platforms in the past had done a ‘really bad job’ at engaging customers in savings and advice; Wealthify does not offer advice, but is committed to creating one million new investors from those currently getting poorer with Cash ISAs and savings accounts that undershoot inflation.

Wealthify aims to ‘operate in a way that your granny (or your children) can understand’; Richard said that customer engagement is ‘everything’ and that it’s ‘all about simplicity’.

He also gave us the rather alarming stat that millennials spend on average three and a half hours a day on their phone, so mobile engagement, social media and gamification will be crucial; he introduced us to the concept of ‘nudging’, as well constructed websites encourage the user into a particular course of action.

Although not yet the requisite year into trading to formally announce performance, Richard said that Wealthify’s ‘adventurous’ portfolio is up 27.4%, albeit that markets around the world have been kind following last year’s acts of populism.

Paul Resnik of Finametrica was next up with his biting and always entertaining invective; with a theme of ‘what lets you sleep at night’ he contemplated whether the financial services business was credible in seeking to ‘regain trust’ on the grounds that it never had it in the first place.

Countering the shift towards ‘outcome based’ solutions, Paul said that the only thing you can control is process and that the ambition should be to deliver a ‘consistent suitability process’.

‘you’re doing a really indifferent job’

His sign off was Antipodean in its bluntness as he threw down the gauntlet to the room by saying ‘I hope I made you feel really crappy – you’re doing a really indifferent job’; with 40 years experience and one of the sharpest minds in the business, his message will not have been taken as anything other than a challenge to improve.

Angelique Schouten of Dutch robo Ohpen said that her experience in retail banking and fintech tells her that infrastructure is the backbone of everything and that it is so important to get that right, from sign up to core functionality.

Thomas Martin of IBM added a behavioural context when considering the 5% fall in markets immediately post June 23^rd; no one wants to see their investments fall by 5% but it is perhaps more palatable if a realistic expectation had been for a fall of 10%.

He believes that a cognitive approach, backed by strong analytics, are at the heart of a successful proposition.

Next up, Rob Hudson of Aberdeen Asset Management was flying solo in presenting The Future of Asset Management; beginning by posing the question of ‘what is guidance or advice’ Rob said that we should not get ‘hung up’ on education.

He championed ‘the power of easy’ citing Amazon’s three-clicks approach; in contrast to some earlier speakers Rob said that customers are not looking for advice, they are looking for a ‘product’.

He said that ‘all roads are leading to retail’ and that asset managers cannot stand still; he said that technology will ‘inevitably’ replace asset management and will support services like ‘remote’ telephone advice.

‘technology will ‘inevitably’ replace asset management’

Asked how companies would differentiate themselves if they all have digital distribution models, Rob said that banks would be OK because of their brands, but that asset managers would fare less well.

In response to ‘with vertical integration could robos eat Aberdeen’s lunch?’  Rob candidly pointed to Hargreaves Lansdown’s transition from ‘fund picker’ to ‘stock picker’ and agreed that his company’s foray into digital was indeed a defensive move.

Vincent Denoiseux of Deutche Asset Management then brought us Delivering Investment Content Through Model Portfolios and started by describing the way in which DB had engaged face to face with investors, wealth managers and fund managers to deliver ‘robust, reliable and transparent portfolio construction’, including the use of smart beta.

Constructing Automated Portfolios was next and Adam French of Scalable Capital kicked off by saying that D2C businesses were ‘using technology to improve the investment proposition’ whilst announcing a white label agreement with Siemens; he described the approach as ‘actively managed risk using passive investment building blocks’, adding that customers ‘need to see something happening’ in response to changing market conditions.

Adam explained that Scalable doesn’t operate with model portfolios in the traditional sense in that each portfolio is individually risk assessed and adjusted – not fixed weights, but constant profile based on fixed ‘value at risk’; he said that the next development would be target tax-efficiency.

Victor Haghani introduced Elm Funds which deliver ‘active index investing’ charged at just 12 bps – 1bp per month – ‘the client knows what to expect’; Marco Parini said that Chebanca used only mutual funds in its seven model portfolios, that are maintained by an investment committee.

Moneyfarm’s Paolo Galvani said that his company used all ETFs, with no smart beta, supported by risk-based quantitative analysis; Thomas Bloch said that Vaamo uses ‘smart rebalancing’.

In presenting AI and Machine Learning in Risk Management, Santander’s Bertrand Hassani said that in the past banks had made a profit by taking a risk, but that now they seek to ‘profit from innovation’ and simply have to have a digital proposition.

He said that innovation based upon AI could lead to ‘convoluted and dynamic strategies’ and questioned whether the current regulation could cover the new model; with many solutions effectively delivering automated decision trees, Bertrand believes the banks can bide their time.

In panel AI and Data, Blake Wood of Envestnet said that analytics and data allowed us to look at a client’s ‘full financial problem’, including mortgages and loans, and using data to analyse spending patterns and drive customer engagement. Clara Durodie of Cognitive Finance said that advisers would become ‘behavioural design specialists’, bridging the gap between man and machine.

‘in the past banks had made a profit by taking a risk, but that now they seek to ‘profit from innovation’

As banks move into becoming data businesses, the panel agreed that a computer and a human is better than a computer or a human; companies like Schwab maintain call centres because people are not ready for a pure AI interface.

With fewer advisers post-RDR those remaining will use automated advice to scale up their businesses to serve perhaps many hundreds of clients to remain viable.

As AI develops it is likely to appeal to millennials that are inclined to trust an algo rather than a portfolio manager; because of their vast computing power, and the amount of data they hold, it is likely that down the line, companies such as Google and Amazon will be significant players in the space.

The final panel VC and Innovation Hubs brought together some of the key players on the funding side of the robos – Susanne Chichti of FinTech Circle, Europe’s first Angel Network for fintech and Rohit Krishnan of Eight Roads Ventures which manages $4bn of VC assets.

Heiko Schwender told us of his experiences heading up digitisation and innovation topics for Commerzbank and we got further insight from Australia, Switzerland and Germany  from Andrew Frost, Alexander Gaillard and Michael Mellinghoff respectively.

 

It was a packed programme with plenty of thought provoking content.

Robo-investing Europe 2017 felt a very different beast to last year’s inaugural event; if last year was about trailblazing, this was all about consolidation; if last year was about the nuts and bolts, this year was about customer engagement; if last year was tempered with some concerns, this year was full of optimism and possibilities.

The first phase technology works, now we need to establish a large number of agreements and partnerships, establish multi-channel distribution capability and then set about the thorny issue of customer engagement; it’s no longer about whether the advisers, banks, wealth managers et al will offer robo or not, it is what their particular iteration will look like, how it will integrate with their existing proposition and how they will take it to market.

In the future, AI promises a paradigm shift as retailers and particularly data rich e-tailers will be able to identify and interpret your every move; serving up solutions to problems you may not even know you have!

Robo-investing 2018 is unlikely to be dull!