Welcome to the Machine
In an exclusive Q&A session with the Muckler, Scalable Capital’s Adam French explains what robo-advice is, who it’s for and why he believes that it is democratising the world of wealth management
Muckler – Fintech is currently the buzz word in financial services, but what is a ‘digital investment manager’ or ‘robo-adviser’ and how do they work?
Adam French – A ‘digital investment manager’ or ‘robo-adviser’ is a wealth management service offered to investors as an online service, usually on the web or as an app.
While the access point for the robo-customer is always digitised, the investment strategies behind the various offerings vary and some are not that different from a traditional investment manager.
Who is robo-advice aimed at?
The dominating belief is that robo-advice is aimed at millennials. While that may be true for some, at Scalable Capital we have had strong demand from a wider age range than we were previously expected. I think that’s down to the sophistication of our investment proposition, which – from our customers’ feedback – is really appealing to experienced investors.
What problem does robo-advice solve?
We live in a very interesting time where many professionals are finding they have less and less time to deal with their finances. At the same time they are aware that many traditional routes are too expensive and perhaps not even accessible due to high minimum account balance requirements. Robo-advice is democratising the world of wealth management.
We should also be aware that our generation will have to invest more to be able to ensure we have enough for our retirement. This means we can no longer carry the burden of unnecessary costs and hidden fees, which are still prevalent in the industry today. Robo-advice finally puts a fair price on wealth management.
Financial advice is tightly regulated, how can the output from an online platform constitute advice and who is culpable if poor advice is given?
For Scalable Capital, this question actually highlights an important difference between ‘digital investment managers’ and ‘robo-advisers’. Most people use the terms interchangeably but in reality there are some offerings that are at the full end of regulated advice – robo-advice – but there are also others like us that offer online discretionary investment management services. What we do is actually quite removed from advice and you might even say guidance as well.
Are all online automated investment platforms the same?
The packaging is often the same but the product is very different.
There is a common misunderstanding about robo-advice; while it always constitutes a digital platform, the way clients’ money is invested is not the same.
Most robo-advisers are very similar to a wealth manager in how they invest your money. They keep portfolios to a fixed weighting, no matter what markets are doing.
At Scalable Capital, the investments we make on behalf of our clients are in line with their risk tolerance at all times and in all market conditions. If at any time our client’s portfolio threatens to exceed the loss risk he or she is willing to take, a risk-reducing portfolio reallocation is carried out automatically.
The ultimate result for clients is simple: the risk in their portfolio is maintained at the level they set it at and fluctuates less with the risks on the financial markets. The idea of re-adjusting portfolios based on their simulated risk level has been applied to investment management before, but only by big banks and for very large portfolios of institutional investors. It’s now time to make this accessible to many more mainstream investors.
What should an investor look for when selecting a robo-adviser?
I think this goes to my point on the ‘packaging’ and the ‘product’. Investors are starting to demand more from robo-advisers, because they understand that technology can not only improve the customer service and user experience aspects, but also fundamentally change the investment processes that are available to retail investors.
So my advice would be to look carefully at each provider’s investment strategy and make sure they can maintain the level of risk appropriate for your future.
Does the advent of automated advice spell the end for traditional financial advisers, or indeed, threaten online broking platforms?
No, I believe it is a chance for partnership and collaboration. All in all, I believe it will lead to more competition which will in the end create better services and products for clients.
How does the new breed of platforms deal with changes in an investor’s personal circumstances or market sentiment – e.g. the uncertainty post June 23rd.
Our technology-based investment strategy is specifically beneficial in times like this. It analyses market data using cloud computing and thus assesses the risk situation of various asset classes. The system constantly monitors each client’s portfolio and uses these risk projections to know if and when to adjust the portfolio’s allocation to stay in line with the client’s risk category.
The EU referendum was an important stress test for us – responding to increasing market volatility ahead of the Brexit decision, our dynamic risk management approach had already shifted our clients’ portfolios into a more conservative mix of investments in recent months, shielding them from the investment pitfalls of the day.
Does the advent of automated advice herald a new era for savings and investment and what will be the most significant change?
With the advent of digital investment management, retail investors will no longer carry the burden of unnecessary costs and hidden fees, which are prevalent in the industry today.
But technology won’t just make investment management cheaper: it will allow advisers to provide a better service for retail investors.
Thanks to cloud computing, it is now possible to offer real portfolio personalisation to investors. Until now, this personalisation had only been available to investors with enough assets to afford a private wealth manager. Those without that access have had to content themselves with ‘model portfolios’.
The new wave of robo-advisers can offer retail investors access to uniquely optimal portfolios specific to their circumstances where every trade is made only if it makes sense for them.
What are the key features of Scalable Capital’s platform and what are your ambitions for it in the UK and what lessons have been learned in Germany?
The key feature of our platform is our risk management technology, which allows us to deliver an institutional quality investment service at low cost. I believe it truly sets us apart from the other ‘robos’ out there.
The reaction from our initial clients in Germany has been overwhelmingly positive, and many have come back to us to commit more funds to our platform. We’ve seen great interest from retail investors registering for our UK launch and we’re looking forward to launching our service here very soon.
Our ambitions for the UK are to replicate and surpass the success we have had in Germany, continue to grow our client base and when the time is right expand in new markets. I believe that Scalable Capital has the potential to become Europe’s leading digital investment manager.
Adam is Co-Founder and Managing Director of digital investment manager Scalable Capital. Prior to this, he spent the last 7 years working in London in the financial services industry at Goldman Sachs. As Executive Director of Commodities Trading, he was responsible for the commodity structured products franchise including risk management and developing client solutions. Prior to this, he worked in Derivatives Trading where he was responsible for electronic trading for private clients in fixed income, currency and commodity products. Adam studied Business Mathematics and Statistics at the London School of Economics and Political Science.
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