The Robo RevoluTion - Ivey Business School · 2016-08-11 · robo-advisors and their impacts are rooted in the US experience. The US has the technological savvy to develop robo-advisors

The Robo RevoluTion Robo-ADviCe MARKeT CoMMenTARY AnD AnAlYSiS

The essential guide to robo advisors for new

entrants and established players in the global industry

Paul Resnik, Director FinaMetrica Research, Stuart erskine MA

november 2015

SeCTion 1 inTRoDuCTion AnD eXeCuTive SuMMARY1.1 Reader’s guide1.2 IntroductionbyPaulResnik1.3 Executivesummary

SeCTion 2 The RiSe oF Robo-ADviSoRS2.1 Insidearobo-advisor2.2 Challengesforrobo-advisors2.3 Thechallengeofacquiringcustomers2.4 Whyrobo-advisorsarechangingthefinancial

distributionlandscape2.5 Whatrobo-advisorsmeanforhumanadvisors

SeCTion 3 Robo-ADviSoR MARKeT AnAlYSiS3.1 Therobo-advisorboomintheUS3.2 USrobo-advisorcasestudies3.3 ThelaginUKandEurope

SeCTion 4 ASSeSSinG A Robo-ADviSoR4.1 Assessingarobo-advisor

SeCTion 5 The Robo RelevAnT ReGulAToRY lAnDSCAPe 5.1 AnalysisoftheFinancialOmbudsmanService

complaintsdata5.2 Analysisoftheroborelevantregulation5.3 AnalysisofroborelevantMiFIDIandII

SeCTion 6 biblioGRAPhY AnD ReSeARCh linKS6.1 Bibliographyandlinkstoresearchresources

SeCTion 7 AnAlYSiS oF inDuSTRY PARTiCiPAnTS7.1 Robo-advicemarketparticipantsanalyzedby

categoryandfeatures

ConTenTS 3

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SeCTion 1 inTRoDuCTion

AnDeXeCuTive SuMMARY

1.1 ReADeR’S GuiDeWho neeDS ThiS ReSeARCh?Peoplewhoneedandusethisresearcharein,orgettinginto,therobo-advicebusinessandneedareferenceandstrategyguidetohelpthembuild,buyorimplementanautomated-advicesystem.Theyare:

• Financialservicescompanieswhoseeautomatedadviceencroachingontheirtraditionalturfandneedtoformulatearesponse;

• Technologycompaniesandotheroutsiderstothefinancialservicesindustry,whoseerobo-advisorsasalow-barrier-to-entrylaunchingpadtothefinancialservicesmarketplace;

• Investmentmanagers,whowillinevitablyendupinrelationshipswithautomatedadviceplatforms;and

• Agentsofchangewhomaintainanexpertiseinthetechnologicaldriversoffinancialadvice.

QueSTionS AnSWeReDThisresearchandanalysiswillhelpyouunderstandrobo-advisorsandrecognizetheopportunityorthreattheyposetoyourbusiness.Weanswerthesecriticalquestions:

• Whatisarobo-advisor?

• Whatisdrivingrobo-advisorsinthemarketplace?

• Whatdogoodrobo-advisorslooklike?

• Whatdisruptionswillrobo-advisorsbringtothefinancialadvicebusinessmodel?

• Whowillmakemoneyfromrobo-advisors?

MARKeTS CoveReDWeanalyzetherobo-advisormarketsintheUS,UKandEurope.

beneFiTS FoR ReADeRS• Detailedreferencesofresearchintotheautomated-advicemarketplace;

• Explanationsofrobo-advisors;

• Acategorizedtableofrobo-adviceindustryplayers;

• Analysisofchallengesforrobo-advisors;

• Strategicanalysisofarobo-advisor’simpactonthefinancialadvicemarket;and

• Aframeworkforassessingarobo-advisorforthesuitabilityofadvice. 

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1.2 inTRoDuCTionRobo-advisorsareaseismiceventinfinancialservicesdistribution.Justlikeanearthquake,theirshockwaveswilltravelgreatdistancesandchangemanylandscapesbeyondrecognition.

Ibelievethatrobo-advisorsarethemostsignificantdevelopmentinthedeliveryoffinancialadviceinthepastthreedecades.Notbecausetheywillruletheworld,becausetheywon’t.Buttheywillchangeitinsomany,oftensubtle,waysthatitwillsoonbehardtoimaginethewaytheworldwasbeforetheyexisted–justastheinternetdidtwodecadesago.

Thenumberofpeopleworkingonbuilding,buyingorimplementingarobo-advicesolutionisgrowingbythedayandwillcontinuetogrowasthecompetitivethreatposedbyrobo-advisorsincreases.

Anumberofthemcomeknockingonmydoorasmycompany,FinaMetrica,suppliesacriticalsectionofthe‘brain’that

arobo-advisorneedstooperate.Withoutascientificallyaccuraterisk-toleranceprocess,liketheonewesupply,robo-advisorsareatriskofrecommendinginvestmentsthatarenotsuitablefortheirclients.Thatexposestherobooperatortotheriskofexpensivelegalactionorintervention,sanctionfromregulatorsandreputationdamage.

FinaMetricaexpectsagrowingdemandforqualitysuitabilityprocessesfromroboadvisors.Norobocanaffordthelossofconfidencethataccompanieslegalclaimsfromdissatisfiedclients.WiththisunderstandingFinaMetricahasdevelopedasuitabilityplug-inInvestorProfilerforexistingandaspiringrobostoenablethemtoprovidethebest-possiblesolutions.

AdvisorsrelyonFinaMetrica’saward-winningriskprofilingprocesstohelpclientsstayinvestedandachievetheirfinancialgoalsbydeliveringsuitableinvestmentadvice.Launchedin1998andproventhroughmarketcycles,FinaMetricaisusedbythousandsofleadingadvisorsaroundtheglobetoscientificallyassesstheirclients’risktolerance,incorporatethoseassessmentsintothefinancialplanningprocessandframeexpectationsmorerealistically.Over850,000FinaMetricariskprofileshavebeencompletedtodate.Weknowtheindustrywellandunderstandtherapidchanges.

Repeatedly,weobservedthatpeopleworkingon,orwith,robo-advisorswereoperatinginavacuum.Theyoftenstruggledtofindinformationabouthowtherobospacearoundthemwasevolving.Theirworldwasendingattheedgesoftheirwhiteboardsandtheywerecallingoutforsomeonetoprovideabroaderperspective.

Thisguideisouranswertothosecalls.Ithasdetailedanalysisandreferenceresourcestoallowyoutomakeaninformed,considered,strategicresponsetotheriseoftherobo-advisor.

Weapplygreaterintellectualrigourtothestrategicdiscussionaboutrobo-advisors.Wegofarbeyondthe‘Terminator’question,whichasks‘willthisbetheriseofthemachinesandtheendofthehumans?’(Inthiscase,thehumanadvisor)because,strategically,thisisasecondaryissue.Undoubtedly,somehumanroleswillbereplacedbyautomation,butthatishappeninginallindustriesallthetime.

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Themoreimportantstrategicquestionsrevolvearoundthestrategicopportunitiesandthreatsthatrobo-advisorsposeforestablishedfinancialservicesplayers,newentrantsanddisrupters.Nooneknowswhererobo-advisorswillleadus,whichiswhatmakesthemsosimultaneouslyexcitingand threatening.

ButofonethingIamcertain–robo-advisorsarelikelytobeasgreatadisruptertothedeliveryoffinancialadviceasUberistopublictransport.Itcouldbeanexpensivemistaketomakeanuninformeddecisiontooperatearobo-advisorortochoosetodisregardordismissthem.

Robo-advisorsaredefinitelytheflavourofthemonth.Withatinymarketshareoflessthan1%ofassetsundermanagement(AUM)theyregularlymakeheadlinesinthefinancialpressandmanydifferentbusinessesarespendingupbigtoquicklygetintothegame.

Thisreportwillhelpyouunderstandwhyandworkouthowyourbusinesscangrab,orprotect,ashareofthemarket.

Paul Resnik

Author,November2015

ReSeARChStuart Erskine MA | Research

StuartErskinehasanacademicbackgroundinbehavioraleconomics,heunderstandshumanbehaviorandhasbeeninvolvedinthedevelopmentoftechnologytoenhanceandimproveonlinetechnologytoimproveconsumeroutcomes,particularlyinthefinancialservicessector.Stuarthasbeenworkingrecentlywithateamofleadingacademicsintheareaofonlinerisksystems.Hehasabreadthofexperiencehavingworkedinseniorrolesinfinancialservicesdistribution,manufacturerandoutsourcingsectors,particularlyinthespaceoftechnology.Hehasatrackrecordofsuccessfullyhelpingorganizationsselectanddeveloptheirtechnologyandimplementinnovativestrategies.Stuarthasawiderangeofclientsinvolvedinrobostrategy,includingstart-upsandestablishedplayers.

FinAMeTRiCA ConTACTSTyler D. Nunnally|USStrategist

Office+14043206047|Mobile+14044922152

[email protected]

2213VistamontDrive,Decatur,GA30033USA

Roderic Rennison|MarketingConsultant

Tel:+447977277416

[email protected]

Paul Resnik|DirectorFinaMetrica

[email protected] 

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1.3 eXeCuTive SuMMARY ‘Howarewetoassessarobo-advisor?’isatop-of-mindquestionforanyoneconsideringbuilding,buyingorimplementingarobo-advisorprocessalongwithotherquestionssuchas:

• Howdoweensurethisdoesn’tgetussued?

• Howdowecomplywithvariousrulestoensureregulatorsdon’tsanctionus?

• Whatframeworkorguidelinescanwepointtoinordertodemonstratethatourrobogivessuitableadvice?

• Isthisgoingtobeacommercialsuccess?

Wehaveconstructedanintelligentframeworkthatwillallowrobo-advisoryprocessestobeassessedfor:

• Businessrisk;

• Regulatoryrisk;

• Investmentsuitabilityrisk;and

• Commercialsuccess.

Wefindsuitabilitytobeaveryusefuloverridingtermforestablishinganassessmentframework,asitcapturesthetwocriticalquestions:

1. Haveyoumadesuitableinquiriesofyourclienttoknowenoughaboutthemtobeabletomakearecommendationrelevanttotheircircumstances?

2.Istherecommendationyoumakesuitabletothem?Thestandardproxyforsuitabilityincludestheperson’srisktolerance.

Tohelprobosovercomesuitabilitychallenges,FinaMetricahasdevelopedasuitabilitysolution,itsInvestorProfiler,aimedatexistingandaspiringrobostoenablethemtoprovidethebest-possiblesolutions.

Oursuitabilitysolutionisbuiltona:

• Marketproven12-or25-questionpsychometricrisktolerancetest.

• Marketproveninvestorprofilingmethodology,whichbringstogetherrisktolerancewithanalysingclients’capacityforlossandtimehorizonissues.

• MarketprovenabilitytoframeinvestmentexpectationsthroughourRiskandReturnGuide.

Thescientificrisktolerancetestandajointlycreatedsetofquestionsandscoringtakesintoaccountinvestors’timehorizons,capacityforloss,risktolerance,knowledgeofinvestmentsandinvestmentexperience.Thishelpsrobosmeetthecommercialimperativeandregulatoryrequirementtodeliveradvicethatsuitsinvestors’needs.

Robo-advisorsarechangingthefinancialadvicelandscape.Thisisnotadistantfuturepossibility;itistoday’sreality.

Robo-advisorsthemselvesareveryimpressiveintheirabilitytodo‘process’workintherelativeblinkofaneye,toaconsistentstandardandatalowcost.Theirscalabilitymakesthembothanopportunityandathreattothoseinvolvedinfinancialservicesdistributionandmanufacture.

Initially,atleast,automatedadvicesystemsfacesixbroadandsignificantchallengestoovercome:

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1. Changingperceptionsoffinancialadvice;

2. Establishingtrust;

3. Meetingadviceandguidancegaps;

4. Economicinfluences;

5. Costofacquiringclients;and

6. Behaviouralbiases.

Thecostofacquiringclientsisacrucialissueforrobo-advisors,justasitisfortherestofthefinancialadviceindustry.Withoutcustomersorinvestors,arobo-advisorismerelylinesof

computercodegatheringdustonaserver.

Marketingyourroboservicetocustomerscanbeveryexpensive.Yetthispointisseldomraisedduringdiscussionsaboutrobo-advisors.

Intheirquesttofindclients,weseerobo-advisorsasbeingasdisruptivetothefinancialservicessectorasUberistopublictransport.Robo-advisorswillallowandhelpworld-changingthingstohappen.Robo-advicesystemsallowmanyotherthingstobebuiltonthefoundationstheycreate.

Currently,robo-advisorsarelimitedinfunctionandscope–westillneedpeoplewhenthingsgetcomplexor‘outsidethealgorithm’.Butthisischangingasrobo-advisorsbecomemoresophisticated.Weseeinthenearfuturetheemergenceofarangeofroboprocessesthatwilltargetspecificareasoffinancialcomplexity.

Americaistheepicenteroftherobo-advisorboom.Anyseriousdiscussionsaboutrobo-advisorsandtheirimpactsarerootedintheUSexperience.TheUShasthetechnologicalsavvytodeveloprobo-advisorsandthelighter-touchregulatorysettingstoallowthemtoflourish.

Robo-advisorsarenotasyetflourishingintheUK;inpartstrictregulationstheremaymakethemsuitableonlyforlimited,lesscomplexadvice.Europeasaregionismoreencouraging,butisaslow-growthregioncomparedtotheUS.

Therobo-adviceindustryischaracterizedbyextensiveactivityamongtheexistinglargeplayers,withexistingclientbasesinfinancialservicesandtheemergenceofwell-fundedstart-uprobo-advisorbusinessessuchasBettermentandWealthfrontwhicharemarketingheavilytowinnewclients.

Weforeseethatoneofthegreatestthreatstoexistingfinancialservicesbusinessesfromrobo-advisorswillbetheeasewithwhichtheyallownewentrantstorapidlyenterthemarketusingwhite-labelroboproducts.

Robo-advisorsbridgethetraditionalmoatsaroundadvicebusinessesandallowanewentranttocrashintothemarket.Brandedrobo-advisorscanbequickandeconomicaltodeployifyoucansupplythecustomers–forexample,throughachurchcommunity,usergrouporevenasportingclub.Arobo-advisormayletyouleadyourcommunityoffthetraditionalfinancialservicesgrid,awayfromestablishedindustryplayers.

We foresee that one of the greatest threats to existing financial services businesses from robo-advisors will be the ease with which they allow new entrants to rapidly enter the market using white-label robo products.

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SeCTion 2 The RiSe

oFRobo-ADviSoRS

2.1 inSiDe A Robo-ADviSoR

Robo-advisorsatthemostbasiclevelsimplyautomatethefinancialadviceprocessincluding:

1. Collectingdataaboutaclient’sidentity,theirfinancialsituation,thegoalsand–importantly–theirrisktolerance;

2. Usinganalgorithmcontainingrisktolerance,financialdataandgoalstoproduceaninvestmentrecommendationthatissuitablefortheclient;and

3. Implementingtherecommendationbymanagingthepurchaseandongoingoperationsoftheinvestments.

Robo-advisorsdon’tdoanythingnewthathumansarenotdoingalready.Butrobo-advisorsdotheworkintheblinkofaneye,toaconsistentstandardandatlowcostandtheirprocessesareeasilyscalable.

WhAT Robo-ADviSoR MeAnSTheterm‘robo-advisor’emergedin2002,whenRichardJ.KoretocoineditasthetitleofhisarticleinFinancialPlanningmagazine.Inmorerecentyearsithasbeenwidelyadoptedasthestandardtermtodescribefinancialadviceprocessesthatare:

• Automatedwithlittle,orno,humaninterventions;

• Deliveredonline;

• Self-service;

• Usealgorithmstomatchportfoliostoclients,basedonassessedrisktoleranceandotherfactorssuchasage;and

• Confinedtorelativelysimpleportfolioconstructionmatters,includingallocatinginvestmentstoassetsclasses,rebalancing,taxoptimizationandaccountaggregation.

Processesthatinvolvetheuseoftechnologyinsupportofahumaninteraction–forexample,anadvisorusinganautomateddata-gatheringquestionnairewithclients–arenotroboinnature.Thesehybridhuman/technologysystemsarebetterdescribedascyborg(halfhuman,halfmachine).Robo-advisorswillcertainlyplayanimportantpartinthecyborgworld,butthebiggerstoryiswhattheycanachieveontheirown.

Dependingonyourdefinition,itcaneasilybearguedthatrobo-advisorshavebeenwithusforaroundadecade.Nonetheless,wegenerallyconsiderthisarelativelynewgrowtharea,witharoundhalfofallrobo-advisorscomingintoexistenceinthelasttwoyears.

WhAT Robo-ADviSoRS DoRobo-advisorsaregoodatproducingtheprocess-driveninvestmentrecommendationandimplementationthatwedescribed.Robo-advisorsexcelinsituationsthataresimple,wherethevariablesarecommonenoughtobefactoredintoanalgorithm.

Atthisstage,robo-advisorsdonot,generally,strayintomorecomplexscenariosinvolvingcomplicatedfinancialadvice–forexample,cash-flowmanagementorretirementincomeplanning.Suchmattersarestillthedomainofface-to-facefinancialplanningbecause:

• Thevariablestobeconsideredaresowide,complexandrandomthattheydefybeingeasilycodedintoalgorithmsthatproducemeaningfulresults;and

Robo-advisors don’t do anything new that humans are not doing already. but robo-advisors do the work in the blink of an eye, to a consistent standard and at low cost and their processes are easily scalable.

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• Inthesemorecomplexscenariospeopleappeartovaluehumaninteractionwhichallowsfor‘live’explanationofconceptswithspecificanswerstospecificquestionsabouttheirownuniquecircumstance.

However,robo-advisorsarerapidlycatchingup.Somecanalreadyhandlerelativelycomplex,buthighlyfocused,situations–theyare,essentially,specializinginoneaspectofcomplexity.Wecannotassumethatrobo-advisorswillremain‘dumb’–wemustanticipatethatrobo-advisorswillbecomeincreasinglymoresophisticatedintheirabilitiesandscope.

Weseethedevelopmentofmanydifferentrobo-advicesystemswheredifferentrobo-advisorshavealgorithmsskewedtowardstheissuesofaparticularbroadgrouping.Forexample,theremaybearobo-advisorforyoung,high-earners,anotherforretireesandoneforblendedfamilieswherecomplexestateplanningneedsmightrequiredifferentparametersinthealgorithm.

Werecognizetheexistence,andongoingprosperityofsomeboutiquerobo-advisorsthatonlydosteps1and2intheprocessdescribedabove–theyare,essentially,sellingthewisdomoftheiralgorithm’sassetallocatorforafee.Theclientmaythenimplementtheirownsolutionhowtheyseefit.

Buttheserobo-advisorsareoperatingatthefringe.Themaingameinrobo-advisorsisbuildingfundsundermanagement(FUM).

WhAT DRiveS RoboSThe‘brains’(decision-makinglogic)thatmakearobo-advisorworkwillbefamiliartomostpeopleinfinancialservices.Sometimesrobosarebuiltfromscratch,butmanyofthemodulesinsidearobo-advisorarebolt-onsormodificationsofexistingfinancialsoftwareandinvolvethere-purposingofwidelyusedportfoliomanagementandriskprofilingsoftwarethathasbeeninthemarketplaceformanyyears.Themaindifferenceisthattheuserinterface(UI)anduserexperience(UX)forrobo-advicehasbeenspecificallycreatedforself-serviceusebyretailinvestors.

FinaMetricaoperatesintherobospace.Wesupplyrobo-advisorswithaveryimportantpieceofthe‘brain’theyneedtoproperlyassessrisktolerancesotherobo-advisorcanrecommendsuitableinvestmentstotheirclients.FinaMetricahasmovedtowardsintegratingsoftwareandprovidingoff-the-shelfrobosolutionsfornewentrantsandestablishedplayers.

ClASSiFYinG Robo-ADviSoRSRobo-advisorsallsharecommoncharacteristics.Attheirheart(if,indeed,arobo-advisorcanbesaidtohaveone?)arealgorithmswithmanycomponentsthatcandifferinmanysubtle,orevenextreme,ways.Robo-advisorsdodifferentthingswell,classifyingthemcanaidunderstandingofthemarketplaceandtheoptionsavailable.

Themostusefulwaytoapproachthisclassificationistoanalyze:

1. Theextentofservicestherobo-advisorprovides;and

2. Howtheadviceisdelivered.

Wehaveutilizedtheclassificationofrobo-advisorsdevelopedinthe‘AutomatedInvestmentAdvisors’paperwrittenbyKymSheehan&Associates.Itanalyzesthefunctionsprovidedandcategorizestheirofferingintoaspectrumrangingfromsimple‘budgeting’servicesthroughto amorevaluable‘adviceoffering’and‘investmentallocation’proposition:

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Category Services Provided

Budgeting tool Simple online cash-flow modeling or budgeting assistance

Financial Planning Education Educational information and guidance on general financial planning matters

Retirement planning & investment wrapper Pension and other investment wrappers which may include ISA, SIPP & bonds

Social media / investment community This may range from sharing of ideas to creation of model portfolios that can be shared

Robo-advisor Usually online series of questions including attitude to risk leading to an advised investment portfolio

White-label capacity Ability for the proposition to be branded and utilized by a third party.

ThedevelopmentpathinthetwocasestudiescontainedwithinthispaperofthelargestUSrobo-advisorsshowsthatmorechallengingadviceareasarebeginningtobeaddressed,albeitslowlyandwithcaution.

FinaMetricasuggeststhateventhemoresophisticatedrobo-advisormodelswillinthenearfuture,bemostly‘lowpersonalization,lowintimacy’customerpropositions.

Theanalysisofthesignificantplayersintherobo-advisorworldiscontainedinSection7–AnalysisofIndustryParticipants.

SuSTAinAble SeRviCe PRoPoSiTionS & vAlue

Intimacy:

Collaborative suitability

Personal engagement

Plan relevance to clients needs

Level of personalization of portfolio

Premium Pricing

Legal:

Tax, Insurance, Estate, Pension Planning

h

h

ll

l hCommodity

Pricing

Commodity Impersonal

Advice & Complex Portfolios

Need/Capacity

v attitude to risk & Model

Portfolios

Life Planning & Model Portfolios

Life Planning

& Personal Portfolios

Life Planning & Highly

Personalised Portfolios

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2.2 ChAllenGeS FoR Robo-ADviSoRS

Webelievethatrobo-advisorsareparadigmchanging,butthatdoesn’tmeantheyhaveafreepassto success.

Wearguethatrobo-advisorsmustovercomesixsignificantchallengesiftheyaretoevolveintoprofitablefinancialservicesbusinesses:

1. Changingperceptionsoffinancialadvice;

2. Establishingtrust;

3. Meetadviceandguidancegaps;

4. Economicinfluences;

5. Costofacquiringclients;and

6. Managebehavioralbiases.

1. Changing perceptions of financial adviceForaverylargegroupofconsumers,investmentadvisorsareself-interestedandgreedy,financialmarketsareriggedandcorruptandtheirmoneyisbetteroffbeingself-investedintorealestate,goldandotherrealassets.

Thiswidelyheldperceptionofthefinanceindustryisjustlydeserved.

Therehavebeenfartoomanyfinancialservicesscandalsthatprovethesetheories,fromanoutrightfraudlikeBernieMadoffthroughtoalocaladvisorchurninganunsophisticatedclientthroughaprocessionofhighbrokerage-feeproducts.Meanwhile,theglobalmarketscollapseof2008hasleftmanyinvestorswaryanduntrustingoftheentirefinancialmarketframework–theywouldratherbuyrealestatethattheycanseeandtouch.

Thefinancialadviceindustryhasfailedtomakeaconvincingargumenttojustifyitsvaluetoconsumers.Theindustryhasstruggledwiththeintangibilityofadvice,thepotentialuncertaintiesofoutcomesshouldmarketscrashandperceptionsofgreedandcorruptionamongthepeoplerunningthe‘system’.Theimpactofthisisthatmostpeopledon’twanttopayforfinancialadvice.

TheresultsoftheA.T.Kearney2015RoboAdvisoryServicesstudyintheUKshouldconcerneveryoneinthefinancialadviceindustry:

• Just14%ofadultsconsideredthemselves‘likely’topayforfinancialadvice,while53%ofpeoplesaidtheywere‘unlikely’topayforadvice;

• Manywouldbeunwillingtopayforanyservicesthattheyhadpreviouslyenjoyedfor‘free’;

• Mostwouldnotpaythehourlyratesforadvicethatadvisorswoulddemand;58%ofpeoplesaidadvicewasworthlessthan£50(US$78)perhour,whiletheaverageadvisorintheUKisexpectingtobepaid£165(US$257)perhour;

• Thelowperceivedvalueofadvicecomesasonly79%ofpeoplesaytheydonothaveagoodunderstandingofsavingsandinvestmentproducts;and

• Despitetheself-acknowledgedignoranceofinvestmentproducts,theabilityto‘self-service’investmentadviceisratedhighly,with37%ofrespondentssayingtheywouldusea‘jargon-free’websiteforfinancialguidance.

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The‘self-service’findingdeservestobetreatedwithgreatcaution.Surveyrespondentsmightbetryingtobeseentowanttodotherightthinginthesamewaytheywouldsay,ifaskedbyastranger,thattheyintendtoeatfruitandundertakeregularexercise.Theymay,indeed,holdthoseintents–butconvertingthemtoactionsisanothermatterentirely.

Wehaveacaseinpoint.Inresponsetofindingslikethese,theUKgovernmentlaunchedtheMoneyAdviceService(MAS)thatprovidesfreeonlinefinancialeducationandguidanceonlineandoverthephone.Whileitisjargon-free,onlineandofferedfree,theservicehasnotdrawnthelevelofresponsefirstthought.Manypeoplearenotactivelyengagedwiththeirfinancialplanningormakingself-directedinvestmentdecisions.Theexperienceofthefinancialservicesindustrysupportsthis–theindustryhasalwayshadtopursuecustomersandcajolethem(oftenthroughfear)toact.

Sowhy,then,wouldanyonechangejustbecausesomeonebuiltarobo-advisor?Whatwouldbesoengagingthatpeoplewouldseekoneout?Whywouldtheysuddenlybehappytopayaroboforfinancialadvicewhentheywillnotpayahuman?

Wecanfindnologicalreasontobelievethatcustomersaremorelikelytoactivelyengagewithinvestmentsandpayafeeforfinancialadvicejustbecauseawebsiteorsmartphoneappisdeliveringtheadvice.

Inthisrespect,webelievearobo-advisorfacesallofthesamechallengeaseveryoneelseintheadvicebusiness,withoneadditionalburden–itmustovercomeits‘inhumanity’andestablishtrust.

2. establishing trustInfinancialplanning,humaninteractionhastraditionallybeenvitallyimportant.Asmanyasalespersonknows,sellingsomethingthatisintangiblerequirestheestablishmentoftrust.Thisisproblematic,becausetrustintheplanningindustryislow.

Trustisdefinedas“apsychologicalstatecomprisingtheintentiontoacceptvulnerabilitybaseduponpositiveexpectationsoftheintentionsorbehaviorsofanother”(Rousseau,Sitkin,Burt,&Camerer,1998).

Repeatedsurveysaroundtheworldshowfinancialadvisorssittowardsthebottomofthetrustladder.AccordingtoGallup,only11%ofAmericansthinkstockbrokershavehighethicalstandards,comparedto15%forinsurancesalespeopleand8%forcarsalespeople.(Wanttobetrusted?Beanurse–theyareconsistentlynumber1onthelist,wherefourofthetopfivemosttrustedjobswearwhiteuniformstowork!).

Thequestionishowdorobo-advisorsshowtheyaretrustworthy?

Toshowyouaretrustworthy,youmustdisplaythebehavioursthatwillleadtopeopletotrustyou.Threeimportantrequirementsare:

1. Becompetentinthemattersinwhichyouclaimcompetence;

2. Bereliable,bydoingthethingsthatareexpectedofyouandthethingsthatyouhavepromisedtodo;and

3. Behonestandtransparentinyourdealingswithcustomers.

Amazonistrustedbecauseitdoesallthesethings–andmore.Amazon’s‘noquestionsasked’refundpolicyencouragespeopletotrustit,bymakingitselfvulnerabletothecustomer.Vulnerabilityisasignaloftrustworthinessandconfidenceinyouroffer.PerhapsanexampleofattemptingtodeveloptrustintheroboworldisWealthfront,whichoffersitsserviceandplatformfreeofchargeforthefirst$20,000.Bydoingthisitissignalingaformofcommercialvulnerabilitythathascontributedinhigheraverageaccountsizesandfees.

Toconvincethebroadpublicthatitcanbetrusted,arobo-advisorwillberequiredtomakethesameinvestmentinprocessesandmarketingtotellthestoryofhowandwhytheyaretrustworthyasanyotheradvisorybusiness.

Trust is defined as “a psychological state comprising the intention to accept vulnerability based upon positive expectations of the intentions or behaviours of another” (Rousseau, Sitkin, burt, & Camerer, 1998).

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Thisrequirementfavorsestablishedbrandsandthelargeendoftowninthecurrentfinancialservicessector,astheyalreadyhavecustomerbasesintowhichtomarkettoquicklyachievescalewhilealsohavingthemarketingbudgetsandcommunicationchannelsneededtoattractnewbusinesstoarobo-advisor. 

3. Advice and guidance gaps‘Advicegaps’arisewhenpeoplewhocouldbenefitfromfinancialadvicedonotreceiveitbecause:

• Theirlevelofassetsistoolowtoviablywarranttheattentionofafinancialadvisor;or

• Theyarenotpreparedtopayafeetoreceiveadvice.

Thequestionofwhatconstitutesarequisitelevelofassetsisaninterestingone.Theanswervariesacrossjurisdictions.

IntheUS,thedesiretomaximizeplannerprofitsappearstobewhythefinancialbarrierstoaccessingafinancialplannerareveryhighcomparedwiththerestoftheworld.USadvisorsfocusalmostexclusivelyonwhatwouldberegardedashighwealthclientsintherestoftheworld.

IntheUK,financialadviceisgenerallymorereadilyavailabletothemiddleclasses–whatmightbetermedthe‘massaffluent’.

IntheUK,thedollarfigurerequiredtoaccessabasicserviceisdrivensignificantlybytheregulatoryframework.Ironically,rulesthatwereintroducedtoprotectconsumersnowdenymanyofthosepeopleanyserviceatallasthecostsofregulatorycompliancearetoohightomakethemfinanciallyviableasfinancialplanningclients.

Itis,perhaps,alogicalconclusiontoseerobo-advisorsasthesolutiontotheadvicegapastheyhavescalabilityandcanservicecustomersatlowcost.Somepeopleseerobo-advisors‘democratizing’financialadvice,makingitavailabletoall.

Thecostofacquiringaclientforarobo-advisorcanbeashighasthatforacquiringaclientforahumanadvisor.Aswewilldiscussinthenextchapter,theacquisitioncostsarelikelytobethedominantcomponentofoperatingarobo-advisor–oftenfarmoresignificantthanthecostsavingsdeliveredbytherobo.

Bydefinition,thoseinadvicegapshavelowerinvestableassetbalances,whichmeans,percustomer,lowerincomefortherobooperator.Robo-advisorsneedprofitableclients–buttoacquirethemasclientstheyneedtoinvestseriousmarketingmoney,whichiswhyexistingbigplayershaveadvantagesovernewentrantstart-upsnomatterhowwellfunded.TheexceptionisperhapsthoseprovidingaB2Brobowhite-labelplatformforexistingdistributors. 

4. economic influencesAroundtheworld,wealthisbeingsqueezedintouppereconomicgroups,withcorrespondingfallsinincomeandwealthforthemiddleandlowereconomicgroups.

Thelossofthemiddlerangeinvestormeansthatanincreasingnumberofserviceprovidersaremarketingtoashrinkingpoolofaffluentinvestors,albeitthateachofthosecustomerscomesbearingalargerpoolofassets.Robo-advisorsaddtothelistofcontendersforahigher-worthclient.

Atthesametime,theremightbeincreaseddemandforrobo-advisorsthatfocusonprovidingbudgetingtoolsandcash-flowforecasting,astheseissuesareofmoresignificancetolowereconomicgroupsthanquestionsofinvestment.

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5. Cost of acquiring clients (CAC)Robo-advisorsneedclientstooperateandthecostofacquiringclientsinfinancialservicesishigh.

Tous,thisistheelephantintherobo-advisorroomthatisseldomdiscussed–whichwebelieveisastrategicfailureofthehighestorder.Wedevotethefollowingchapterofthispapertothisissueasitisanoverridingconcernthathangsoverallotherdiscussionsaboutrobo-advisors.

Acquisitioncostsincludethecostsofinitiallyfindingaprospectandthenconvertingthoseprospectsintoclients,withtheinevitableattritionratethatthoseconversionsincur.Whentotalcostsarecomparedtoclientsgainedtheresultscanbesurprisinglyhigh.LucianCampcalculatesthecostofacquiringaclientintheUKtobearound£200(US$312).

Thiscostisbeyondthemeansofmanyadvisoryfirms,whichiswhytheygrowratherslowly–largelythroughword-of-mouthreferral.Inthepast,theymighthavereliedonproductmanufacturersanddistributorstoprovidethemwithmarketingsupport.UndernewregulationsintheUKsuchsupportsarenowlargelynolongerpossible.ButtheycontinuetothriveintheUSmarketplace.

Inaworldwhereformerspecialtieshavebecomecommoditized,beingabletomakeafinancialproductorservicenolongermakesyouspecialasitoncedid.

Where,inthepast,youmayhavebeenabletoextractaneconomicrentbecauseyouoccupiedapositionofadvantage,marketforceshavenowequalizedyou.

Today,theability(knowledge)andcapacity(cash-flow)toquicklymarketfinancialproductstoscaleiswhatseparatessuccessfulfinancialservicesbusinessesfromthe‘also-rans’.

Itdoesnotmatterifyouarriveatthemarketplacewithabettermousetrapifthattrapishiddenwherethemicecannotfindit.Cheese–intheformofmarketing,advertisingandpromotion–willhelptoattractthem.Butcheeseisn’tcheap.

Wereturn,onceagain,toourinitialcaution–robo-advisorsareverygood

atservicingcustomers,butdonothingtoattractcustomers.Puttingarobo-advisortoworkeffectivelyrequiresconsiderableinvestmentinmarketingandpromotions,withnoguaranteeofsuccess.

Vitaminsandsupplementsareequallygeneric.Yet,afamilybusinessinAustraliafiguredouthowtocreateabrandthatmadegenericinputs‘special’.Inlate2015,aChinesefirmacquiredthevitaminandsupplementcompany,Swisse,forA$1.5billion(US$1.05billion).

Swisseisamarketingmachine–itisconstantlyinthenews,throughitssponsorshipofhigh-profileambassadorsanditspendsalotofmoneyonadvertising.ItisrumoredthatitsannualmarketingbudgetisA$50million(US$35million)whenthecostoftherawmaterialsforalloftheproductsitmakesislessthanA$5million(US$3.5million).VitaminCisnotspecial–beingpartofthebrandimageandlifestyleSwissepromotesisspecial.MorethanUS$1billionworthofspecial!

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6. behavioural biasesItishumannaturetowantitnow.Butitisalsohumannaturetomakeplansforthefuture,includingsavingmoney.Ofcourse,thetwonaturesquicklycomeintoconflict.Youwantaholidaynow–butspendingthemoneywillreduceyourpensionin30years’time.

Moreoftenthannotyour‘present’selfwilldefeatyour‘future’self.Thefuturelossissofarawaythatitisdiminished,butthepresentbenefitisNOW!“Packyourswimsuithoney,wearegoingtothebeach”.

Thereisgoodreasontobelievethatrobo-advicesystemsmightdoamuchbetterjobthanhumansystemsathelpingpeopleconfrontandmanagethis‘present-day’bias,byallowingthemtovisualizetheimpactoffinancialdecisionsmadenowprojectedintothefuture.

Thecostsofmanipulatingandreportingdatathatalreadyexistswithintherobo-advisor’sdatabasesisnegligible,tonil.Therobocandoitinmanydifferentwaysthatarefarmoreengagingthansimplysendingapaperstatementaboutthevalueofyourinvestmentseverysixmonths.Robo-advisorscancreateemails,texts,tailor-madevideos,customized webpagesandmore.Thedataistheretobeiteratedas youplease.

Forseveralyearsithasbeenpossibleformanagersofretirementsavingsandinvestmentstoreporttotheirclientsusingtailor-madevideos,withavoiceoverscriptalongthelines:

HiGeorgina.Youarenow60%ofthewaytothe<<insertfinancialgoal>>goalyousetforyourself.Greatwork!Youare15monthsaheadofschedule!

DuringthevideoweseeGeorgina’sfinancialgoalandhistoryportrayedinchartsandforecastsonthescreenasthenarrationdiscusses:

Thisishowyoudidit.Yourcontributionswere<<insertamount>>andyourearningswere<<insertearningsrate>>percent.Ifeveryyearwaslikethisyou’dreachyourfinancialgoalin8yearsand7months.Butamorerealistictarget,toallowforfluctuations,isaround10years.Eitherway–greatjob!Youareontrackforsuccess.

Thesefullyautomatedvideosarecreatedusinga‘data-dump’fromthefinancialservicesfirm.Theprovidercancreatemillionsofvideosatatime.

Justasbathroomscalescanbeamotivatortodiet,thesetypesofcommunications,atwhichrobo-advisorsshouldexcel,maybeatruemotivatorformanypeopletoovercomepresent-daybiasandsaveforthefuture.Theproliferationofinteractivemobiledevicesoffersagreatplatformforrobo-advisorstointeractgraphicallywithclients,nudgingthemtomakebetter-informedfinancialdecisions.

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2.3 The ChAllenGe oF ACQuiRinG CuSToMeRS

Thecostofacquiringcustomersistheperpetualthorninthesideofthefinancialservicesindustry.Inmostcasesthecostsofactuallyservicingtheclientaresmall,comparedtothemarketingcostsofbringingtheclientonboard.

Everydiscussionandnewsreportappearstostartwiththeassumptionthatrobo-advisorssomehowfindtheirowncustomers.Theconversationthenquicklymovesontohowefficientlytherobo-advisorwilldealwiththesecustomers.

Thisisadangerouslyincorrectassumptionwhichwill,inevitably,destroymanymillionsofdollarsofshareholdercapitalandspoilmanycareersinfinancialservices.

‘Ifyoubuildittheywillcome’simplydoesn’tapplyinfinancialplanningservices.Wecanreadilystrollthroughagraveyardoverflowingwithwell-made,fit-for-purpose,innovativefinancialplanningITplatformsthatdiedforthesamereason–theycouldnotengageenoughcustomerstofeedthemselves.

SiliconValley’sinvolvementinrobo-advisorshashadabiginfluence.Its‘Builditfirst,worryaboutthecustomersandprofitslater’mantraworksinmanyuniverses,likesocialmediaandcomputergames.Butinthefinancialservicesuniversethatattitudemaybeilladvised.Customershavealwayshadtobefound–onlyaminoritycomesknockingonyourdoorbeggingforservice.

Theclientacquisitionissueisslightlydifferentforthoseestablishedorganizationswhohaveexistingclients.Thereisariskofcannibalizingtheexistingbusinesscombinedwithunsettlingexistingconsumerexpectations.

Largeplayersinfinancialserviceshavetwofeaturesincommon–theenormouspilesofcashrequiredtogenerateleadsandarmiesofhumanstoprocessthoseleadsandconvertsomeintocustomers.

Thoseexistingsalesprocesses,thickwiththeirhumaninteractionsandrelationshipbuilding,havetraditionallyactedasamoatagainstnewentrantswhocouldnotaffordtofindsuchasalesforcetodistributetheirproducts.Robo-advisorsarenotgoingtochangethewaycorporationssetaboutfindingtheircustomers–theywillstillbeacquiredthroughmarketingandreferral.

Butrobo-advisorswillchangethewaythatthecontrollersoflargecommunitiesofpeoplesetaboutprovidingfinancialservicestothosecommunities.Thisiswherethemaximumrisksliesforexistingplayersinfinancialservices.Robo-advice,purchasedaswhite-labelandbrandedforacommunity,willdislodgecurrentproviders. 

Thecostofacquiringacustomerwithinacommunityisafractionofgoingtothe

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widermarket.Weallknowthistobetrue–itiswhyfinancialadvisorsjointhegolfclub.

Sowhoarethecontrollersoftoday’scommunities?Theyareallaroundus!Theyare:

• Corporations

Peoplecanbecrazilyloyaltobrandstheylove.Thosebrand-loyalistsareacommunity.Apple,forexample,hasthemostloyalandcommittedcustomerbaseofanyITcompany.Imagine,foramoment,theimpactofAppleofferingfinancialservicesthrougharoboembeddedintotheoperatingsystemofitsiPhonesandiPads.

• Community groupings and associations

Churches,sportingclubs,andcommunitygroupsarejustafewexamplesofself-selectingclustersofpeopleforminginactivitiesinwhichtheyhappilychoosetoparticipate.Theseclustersareengagedandeasytocommunicatewith–theycanbesoldtoatverylowcost.Andtheywillbe,inevitably,biasedtowardsanofferthatemergesfromwithintheir‘circleoftrust’.

• People who have followers

Today,alocalbloggermayhavehundredsofthousandsofpeoplereadingtheirblogdailyorweekly.SomeonewithapopularYouTubechannelmayhavemillionsoffollowersgettingregularupdatesintheirinbox.Meanwhile,theworldinwhichwelive,billionsofpeoplefolloweverybreaththatKimKardashiantakes.Iftheywillbuyherperfume–andtheydo!–whywouldtheynotbuyherinvestmentwebsite?Allshehastodotodrivetrafficthereistomakeonetweet–marginalcost,$0.

Arobo-advisorcanbeallplaces,atalltimes,foralltechnology-engagedcustomers.Robo-advisorsbridgethemoatandallowanewentranttocrashthemarket.Brandedrobo-advisorsarequickandrelativelylowcosttodeployifyoucansupplythecustomers.Arobowillletyouleadyourfollowersoffthetraditionalfinancialservicesgrid,awayfromtheestablishedindustryplayers.Thekeytoprofitablefinancialservicesbusinesses,whetherhumanorrobo,isstilltheacquisitionofcustomersatareasonablecost.

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2.4 WhY Robo-ADviSoRS ARe ChAnGinG The FinAnCiAl DiSTRibuTion lAnDSCAPe

Intheirquesttofindclients,weseerobo-advisorsasbeingasdisruptivetothefinancialservicessectorasUberisbeingtopublictransport.

Uberisagreatexampleofsomethingthatwasmadepossiblebytheinternet.Withoutthenet,Ubersimplycouldnotbe.Andyet,theinternetalonedidnotchangetheworldoftaxis–Uberdidthat.Theinternetwascertainlyavitalpieceofcommunicationsinfrastructurewhichallowedaworld-changingthingtohappen.Butit’snotthetechnologyitselfthatisrevolutionarytoday–itishowitconnectspeople.

Currently,thedebateislimitedtohowrobo-advisorsaffectestablishedplayersand,giventheirexperience,capital,advertisingandexistingclientbases,youcanbeassuredthattheestablishedplayerswillbeatthetable.Surprisingnewentrantsmayemergeintherobo-advicesectorthatmaychangethefundamentalrulesofthefinancialservicessector.WhatifAARP(AmericanAssociationofRetiredPersons)enteredthemarketwithabrandedwhite-labelrobo-advisor?WhatifAldiorLidldidtoo?

Atthesametime,weseeandacknowledgeadegreeofresistanceandbacklashtorobo-advisors.Thisisunsurprisingas,historically,allnewtechnologiesareviewedwithsomesuspicion.

Youwillverysoonbesparedthesharpshockofyourdoctor’sicy-coldmetallicstethoscopeonyourchestorback.Everyonethoughtitsinventor,ReneLaennec,wasalunaticandrejectedhisdeviceoutofhand.Twohundredyearson,onlyalunaticcouldimagineadoctor’ssurgerywithoutastethoscope.

ButLaennechimself,fromhisrestingplace,mightbealittleresistantaboutthelatestdisruptertohispatch.

Hand-heldultrasoundscannersarethreateningtoreplacehisstethoscopebecausetheyareasuperiortool.Theyaremoreaccurate,morereliableandevenintelligent;theyusealgorithmsandheuristicstomakeadiagnosis.WhathopethenforLaennec’sstethoscope,onceconsideredacutting-edgetool?

Whichleadsustotwocriticalquestionsthatmostpeopleask:

1. Arerobo-advisorsbettertoolsthanhumanadvisors?

2. Ifso,willrobo-advisorsreplacehumans?

Theanswertoquestiononeisthatrobo-advisorsareverygoodatthelimitedfunctionstheyperform.Theirlackofhumanfallibilityalmostguaranteesthemtobefaster,moreaccurateandmoreconsistentthanyouorme.

Andso,toquestiontwo.Istoday’sadvisoralreadyonacountdowntooblivion?Thisisacompellingquestionanditiseasytofixateonit,particularlyifyourjobisonethatmightbereplaced.Butitisnottheonlyquestionposedbyrobo-advisorsnor,necessarily,isitthemostimportantquestiontobeasked.

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Nonetheless,let’sdealwithit.

Robo-advisorsbringviableself-servicetofinancialadviceforthefirsttime.

Theiradvicewillbelowcosttodeliver(althoughperhapsnotlowcosttomarketandpromote),consistentandmakeiteasiertomaintainmeaningfulconversationswithcustomersabouttheirmoneythroughhighlyeffectiveautomatedcommunications.

Astravelagentsandbanktellersknow,manypeoplewillself-servewhentechnologyallowsthemto–andifenoughpeopleself-serveyoucanstartreplacingemployeeswithmachines.Butmakinginvestmentsisdifferenttobuyingair-tickets.Alotofpeoplewantthecomfortthatdealingwithanotherpersoninatrustingrelationshipcandeliver.

Thesecondfactortorecognizeisthesignificancethatrobo-advisorsarelimitedinfunctionandscope.Westillneedpeoplewhenthingsgetoutsidethebox.

Thereisnotarobointheworldtodaythatproducesameaningfulanswertoverycomplexfinancialsituations.Forexample,therearenoalgorithmsthatweknowofthataddressestateplanningconsiderationsacrossmultiplefamilyunitsusingassetsheldindifferenttrusts.Itisgoingtotakeaperson(andquiteaskilledoneatthat)toaddressthoseissuesusingallthetraditionaltoolsintheirfinancialadvisorkit.

Thatisnottosaythatnojobswillbelostbecauseofrobo-advisors–therewillbelosses.JustasarmiesofclerkslosttheirjobsbecauseMicrosoftExcelwasbetteratdoingthemundaneslogworkthanthem,robo-advisorswillreplacepeopleintasksthatareprocessdrivenandlendthemselvestoautomation.

Weseethedaysofsomeonewithaclip-boardtakingafinancialhistoryinafact-findasbeingverylimitedindeed.Thisraisesaninterestingquestionofhowmanyadvisorswillengageclientsinadiscussionabouttheirfinancialaffairsasmanycurrentlyusethefact-findasaninterpersonalget-to-know-yousession.Whenclientskeytheirowndatafromhome,theadvisorneedsanewtooltogeneratethatdiscussionandengagement(wearguethattoolisadiscussionoftheperson’srisktoleranceandwhatthatmeansforthemasinvestors).

But,overall,weseeadvisorjobsasbeingatriskmoreatthemargins–wedon’tseemasslay-offsoffinancialadvisorstobereplacedbyrobo-advisors.Jobsareevolvingallthetime–displacement,inourview,isnotwhyrobo-advisorsreallymatter.

Meanwhile,peoplearesimplytoogoodatsellingfinancialservicestobedumpedasadistributionchannel.Face-to-facemarketingwillalwayshaveaplace–butfromwhatweseetodaywecannotanticipatehowbigthatplacewillbeinthefuture.

Forlarge,existing,playersinfinancialservices,robo-advisorsmaybeanopportunitytolowerback-officeandservicingcostsoropenupnewdistributionchannels.Theywillhavetheenormousmarketingspendrequiredtogenerateleadsandconvertsomeintocustomers.

Atthesametime,thatverysametechnologyinthehandsofadisruptivenew-entrantcouldstrikeadeathblowtomanyestablishedfinancialservicesfirms.Withrobo-advisors,thecompetitivequestionmightbecome‘DoyourememberBlackRockandSchwab?TheyusedtobeinfinancialservicesbackbeforeAppleincorporateditsrobo-advisorintotheoperatingsystemoftheiPhone8.

Robo-advisorsarequickandlowcosttodeploy,allowinganyonewithacommunitytocreateandbrandtheirowninvestmentplatformforthatcommunity.Fromachurch,toafishingclub,toapopularbloggertoAmazon.Ifyoualreadyhavethefollowers,arobo-advisorwillletyouleadthemoffthetraditionalfinancialservicesgrid.

Thatiswhereweseethethreattotheexistingindustryplayersandtheopportunityforthedisruptersandnewentrants.Andthatiswhyrobo-advisorsmattersomuch.

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2.5 Robo ADviCe FoR ADviSoRS

In1994,OJSimpsonwasontherunfrompolice,theUSFederalReservewaspayingyieldsof8.5%andagallonofgascostUS$1.09.Itwasalsowhenwestartedthinkingaboutinvestmentsuitability–matchinginvestmentstoclientsandtheirneeds–andwe’vebeendoingiteversince.

Overthattwenty-oneyears,wehaveworkedextensivelywithadvisorsaroundtheworldtohelpthemdeliversuitableinvestmentadvicebyaccuratelyandscientificallyassessingtheirclient’srisktolerancewithaprovenpsychometrictest.We’vecometoknow,andunderstand,advisorsverywell.We’vedonenearlyonemillionriskprofilesformorethan6,000top-endadvisorsinmorethantwentycountries.We’vefoundthatpeoplewhoareinvestedinaccordancewiththeirrisktolerancetendtobemorelikelytostayinvestedforthelongerterm.Thatmeansamoreprofitableadvicebusinessfortheadvisor,becauselong-termhappyclientscreatefewerfrictionsandrefermoreoften.

Backin1994wesawtheareawhereanadvisor,theclientandinvestmentsmeetwasliketheBermudaTriangle–whilemosttravelledeasilythroughit,manydisappeared.Wecouldn’tunderstand(andstillcan’t)whysomanyfinancialadviceprocessesemphasizethespeedofthesale,ratherthanthequalityofthesale.Agoodsalecancreatealong-termclient,whereasarushedsalecancreateaclientwhobecomesunhappyandvanishes(orevenworse,resortstolitigationagainstyou).

Webelievethatarigorous,scientificassessmentofrisktoleranceisanessentialstepinagoodsale.Ittookusmorethanfouryearstoindustrializethatbeliefintoa25-questionpsychometricrisktolerancetest,whichwaslaunchedin1998.Sincethen,wehaveconfirmedthatrisktoleranceisattheheartofsuitableadviceandhappyclients.

We’veprovedthatrisktoleranceisastablepersonalitytrait–evenwhenconfrontedwithmajormarketupheavalssuchas2007-08.Weknowthatifyoumatchtheinvestmenttotheclient,thentheclientismuchmorelikelytostaywiththeinvestmentthroughgoodtimesand,moreimportantly,whentherearestorms.Whilethecoreofourbusinesshasbeenadvisors,wealsoworkextensivelywithsomeoftheworld’slargestandmostsuccessfulinvestmentmanagerstomaptheirmulti-assetportfoliostoFinaMetricarisktolerancescores.

Today,weareworkingwiththenextevolution,robo-advisors.Automated-advicesystemsneedsmartinvestmentsuitabilitytools,likeourrisktolerancetestandmappings,to‘plug-in’totheiralgorithms–justaseveryminerintheCaliforniangoldrushneededashovel.Ourrisktolerancetestisthebestofbreed.Ithasbeentriedandtestedandwebelieveitshouldbecomethestandardsuitabilitytestforrobos.TheymayevenboastaboutusingFinaMetricaaddingvaliditytotheadviceprocess,indeedFinaMetricaPRactivityisaimedatdevelopingthebrandtosupporttheadvisorcommunity. 

So,basedonallweknow,hereisourtakeonwhatrobo-advisorsmeanforyou,thehuman-advisor:

1. Robos are big.You’regoingtohearalotaboutthemandtheywillimpactonyourlife.Webelievethattheimpactwillbeoverwhelminglypositive!Don’tbelievethegloomthatsaysroboswillreplacehumanadvisors.Theywon’t.

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2. Robos will be everywhere.Everyoneinthefinancialservicessupplychainwillhavearobo,eitherasadirect-to-consumerofferingorasatoolforfinancialadvisorstouse.

3. Your client base may be under threat.Roboswillbeeverywhereandyourclientswillbecourtedbythem.Yournewcompetitormightbeacluboracommunitybasedorganizationoraffiliate–anyorganizationwithalargemembershipcouldsoonbeinthemarketforawhile-labelrobo.

4. There will be many different robos for different purposes.Youwillhaveachoiceofrobos,whichwillnotallbethesame.Ifyouplanonworkingwithanyoneyouwillneedtoassessitcarefullytoensureitwillbefitforyourpurpose.

5. early-movers don’t necessarily win.BettertomakeaconsidereddecisionanduseproventechnologyandprocesseslikeFinaMetrica’sriskprofilingsystem.

6. Robos will have to adopt suitability standards.Toflourish,roboswillhavetomeetthesamesuitabilitystandardsashumanadvisors.Itisunimaginablethatanadvicebusinesswouldwantthesameclientgettingadifferentrecommendationdependingonwhethertheyusedroboorhumanadvice.Abusinessbuiltonamulti-factorassessmentofrisktolerance,riskcapacityandriskneededwill,ofcourse,expectthosesamestandardsinarobo.

7. Dealing with non-assigned clients and other relationships.Robosarequickandaccurateatprocesswork,likecollectingdata.Andtheymakethingsfast–aninvestmentrecommendationcanbeonthetablemomentsafterthedataiscollected.Itwill,ofcourse,beexpectedthatrobosmustintegratewithyourbusinesspractices.

8. low-cost, multi-asset portfolios are here.Robosdealinverylow-costinvestmentstructuresandthatisgoingtochallengecurrentthinking,currentpracticeandprofitability.Likeripplesinapond,overtimetheeffectbecomesunpredictableevenwhenitstartedoutverystructured.

9. You will have to prove your value proposition.Advisorsareprofessionalswhoaddvaluetotheirclients’financiallives.Bereadytoprovethat,becauseyouwillhavetobeabletodosupplythatprooftochargehigherfeesthanarobo.

10. Fees may come under pressure.Justaslow-costairlinesloweredairfarecosts,robosarelikelytobringdownthebase-costofadvice.But,justaswiththeairlines,somepeoplewillnotwanttoflywiththecheapest;somewillbehappytopayfulleconomyandsomewillwantthesilver-servicethatcomeswithfirst-class.Themoreholisticanddetailedyouarethemoreyouwillwin.Robosarenotcurrentlygoodatcomplexmatterssuchtaxorestateplanningorinsurance.Possiblywewillseetraditionaladviceoperatingtocreatethefinancialplan,withrobosdealingwithongoingtransactionalneeds.

Therobospaceischangingveryquickly.Thisreportonroboshasbeenrewrittenseveraltimes,aseverytimewebelievewearefinishedanewstoryemergestochangethelandscape.

FinaMetricaisworkingontechnologytoanalyzetheongoingsuitabilityofinvestmentsforclientsonbehalfofroboproductproviders.Thiswillhelpguidecommunicationstrategyandengagementwithclients.

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SeCTion 3 Robo-ADviSoR

MARKeT AnAlYSiS

3.1 The Robo-ADviSoR booM in The uS

Americaistheepicenteroftherobo-advisorboom.Anyseriousdiscussionsaboutrobo-advisorsandtheirimpactsarerootedintheUSexperience.

TheUShasthetechnologicalsavvytodeveloprobo-advisorsandtherightregulatorysettingstoallowthemtoflourish.

Robo-advisorsarebeginningtogatherpaceintheUK,buttheyarenotaswellestablishedthereinpartduetothestrictregulationsinplacewhichmakethemsuitableonlyforverylimited,simplifiedadvice.Europeismoreencouraging,butisaslow-growthregioncomparedwiththeUS.

AstudybyCorporateInsightshowsthat,collectively,robo-advisorsintheUSdirectlymanageaboutUS$19billionAUM(assetsundermanagement)asofDecember2014.Thisisa21%increaseinAUMsinceJuly2014,anda65%sinceApril2014.Theseareveryimpressivegrowthnumbersinanindustryunderpressurefrommanydifferentforces.Ofcourse,itiscomingfromanadmittedlylowbase–robo-advisorsholdlessthan1%ofthetotalmarket.

AlthoughAUMisasomewhatcrudemetric,itisundeniablethatawarenessofrobo-advisorsintheUSisincreasing.

A.T.Kearney’sstudyfoundthatapproximately20%ofconsumersintheUSareawareofrobo-advisoryservices.Unsurprisingly,themajorityofearlyadoptersofrobo-advisorsareagedunder35years.

Americaisalsoasomewhatuniquemarketplace,wheretheadvicegapisveryrealformanylower-wealthinvestors,whodonothaveanyaccesstoanykindoffinancialadvice.Robo-advisorsareseenawaytodemocratizefinancialadviceforthissector(ataprofit,ofcourse–shouldthatbepossible,giventhemarketingcosts).

25%

25%

22%

20%

13%

13%

12%

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ItisinterestingtoanalyzetheA.T.Kearneyresearchregardingthefactorsthatwereimportanttocustomerswhenchoosingarobo-advisoryoffering.

Pricingisclearlythedominantdriver.Itis,perhaps,alittlediscomfortingtoseethatonlyoneoutofeveryfourcustomersexpectstheirinvestmentmanagertobecompetent!Itisinterestingtonote,meanwhile,thatveryfewpeopleareexpectingtheirrobo-advisortoofferthemanyformofrelationship.

Todate,theboomforrobo-advisorshasreallybeeninpublicrelations–itisimpossibletoreadindustrypresswithoutseeingmanyrobo-advisorstories.Eveninthemainstream,themediaispresentingstoriesaboutrobosfromauser/customerperspective.

Weseethesestoriesastinypocketspoppingupfromahugegroundswellofactivityinthefinancialservicessector.

Weknowthatstrategysessions,boardmeetingsandbudgetsareallbeingsetasideforimplementingrobotechnologies.Muchofthisworkisbeingundertakenprivately–thereisnowayofknowingwhateveryoneisworkingonorwhatwillcomeoutofthisboomininvestmentindevelopingroboplatforms.

Thebarrierstoentryforprovidingrobo-advicecanbelow.

Acompanycouldpurchaseawhite-labelrobo-advisor,perhapsfromBlackRockafteritsrecentpurchaseofFutureAdvisor,andhaveanofferinginthemarketplaceintheblinkofaneye.Thismayalsobethemosteffectivewaytode-riskarobofromabusinessperspective.

Relationshipservices

Simplicity

Investmentexpertise

Pricing(cost)

16%

23%

25%

36%

0.00% 10.00% 20.00% 30.00% 40.00%

DRiveRS FoR ChooSinG A Robo-ADviSoR

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FinancialcommentatorMichaelKitceshaswrittenontherecentBlackRockacquisitionofFutureAdvisor.FutureAdvisorisoneofthethreeoriginalandpurerobo-advisorswhichhasbeengatheringassetsandmanagingETFportfoliosdirectlyforconsumers.EventhoughFutureAdvisorhasjustUS$600millionofAUM,andanestimatedUS$3millionofrevenue,BlackRock’spurchaseisreputedtobeinexcessofUS$150million.

KitcessuggeststhatBlackRock’sstrategywasnotsimplytobuyFutureAdvisortoexpanditsdirect-to-consumersolution,butinsteadtopivotFutureAdvisortobecomearobo-advisor-for-advisorssolution,andlicenseorofferthetechnologyplatformtoawiderangeofbroker-dealers,insurancecompanies,banks,andcustodianstoturntheirhumanadvisorsintotech-augmentedcyborgadvisors.

Inthiscontext,astheworld’slargestassetmanagerandaleadingplayerintheETFspacealready,theBlackRockdealappearstobevisionedprimarilyasameanstofurthergrowthesizeoftheETFpieandtheBlackRock(iShares)marketsharebydrivingdistributiontoitsETFsthroughthisnewtechnologyplatform.Therobo-advisor,therefore,isnowadistributionchannel.AsimilarstrategyhasbeenundertakenbyLV=intheUK,withLV=havingtakenalargestakeinUKrobo-advisorWealthWizards.

OtherslikeNutmegarerecruitingfinancialadvisorstoaddtosupporttheircurrentautomatedprocess,perhapsrealisingthatfinancialadvisorsareanimportantpartofclientrecruitment.

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3.2 Robo-ADviSoR CASe STuDieS

WehavethreecasestudiesofUS‘pure-play’robo-advisorprocessesandsystemsinactiontoexamine:

1. FutureAdvisor

2. Betterment

3. Wealthfront

FuTuReADviSoRFutureAdvisor,thesmallestofthethreerobo-advisorsanalyzedindetailhere.ItwasrecentlypurchasedbyBlackRock.BlackRockisrumoredtohavepaidmorethanUS$150milliontobuyjustUS$3millionofrevenuefromUS$600millionofAUM,inETFportfolios.

Clearly,BlackRockwaspurchasingatechnologicalheadstartontherobomarketandnotarevenuestream.BlackRocksaysthatitwillmaintaintheFutureAdvisordirect-to-customerwebsite,butthatisobviouslynotacoredriverfortheacquisition.

PlatformslikeFutureAdvisorneedpassiveinvestmentchannelstofunctionandBlackRock’saresomeofthebiggestaround.BlackRockisoneofthelargestissuersofETFsandisthelargestassetmanagerintheworld.ItcouldwellviewFutureAdvisorasjustanotherdistributionchanneldownwhichtopumpindexfundsandETFs.

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beTTeRMenT Bettermenthasbeeninbusinessasarobo-advisorforjustoversixyearsyears.Overthattime,ithasreachedover100,000customersandhasmorethanUS$2.5billioninAUM.

Thechartshowsthereleaseofnewclientproductsoverthetime,fromtheoriginalofferingofgoal-basedinvestinginSeptember2011toretirement-incomeproductandtaxlossharvesting.

BettermenthashadfourseparatecapitalraisingsovertimetosecureatotalinvestmentofUS$105million.Astaffofover100servesthisclientbase,withfiveemployeesperforminganinvestmentadvisor/advisoryfunctionincludingresearch.Theratioofemployeesperforminganinvestmentadvisorfunctiontoclientsis,therefore,inexcessof1:12,000.Thisillustratestheefficiencyandleverageofferedbytherobo-advisormodelregardingadvice.Face-to-faceadvisorsgenerallyhave100to200clients–thatkeepstheirdiariesfilledfortheyear(somemay,inextremecases,haveupto1,000clients).

WhileBettermenthasbeensuccessfulinattractingasignificantnumberofclients,theaveragesizeofthoseaccounts(calculatedasAUMdividedbynumberofclientaccounts)isjustoverUS$22,500.

BasedonitsdisclosedfeeratesforaminimumaccountofUS$10,000(the‘better’rateof0.25%ofAUMperannum,billedmonthlyinarrears),thismeansrevenueofjustunderUS$50peraccountperannum.

Source:BettermentWebsite

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WeAlThFRonTWealthfronthasbeeninbusinessasarobo-advisorforjustoverfouryears.Wealthfrontclaimstobetheworld’slargestrobo-advisorwithUS$2.6billioninFUM.

Wealthfrontistargetingtheso-calledtech-savvymillennials(millennialsarethosebornbetween1980-2000).Todate,60%ofitsclientsareagedunder35yearsand90%areunder50yearsold.

WealthfronthashadfiveseparatecapitalraisingsovertimetosecureatotalofUS$129million.It,too,wasredhotwithinvestors–withFutureAdvisorbeingsnappedupit’sbecomeevenhotter.

AccordingtoWealthfront’sCEO,theaverageaccountsizeofits22,000clientaccountsisjustoverUS$90,000:ThisisoverthreetimeshigherthantheaverageclientaccountatrivalBetterment.

Wealthfrontdoesn’tchargeanythingforthefirstUS$10,000invested(atrust-building‘free’trial),withamanagementfeeof0.25%abovethat.ThismeanstheaveragefeeperaccountisaroundUS$175. 

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hoW Robo-ADviSoRS MARKeT TheMSelveS

Interestingly,bothWealthfrontandBettermentareusingsimilarmarketingmessagesfocusingon:

• Easeofuse;

• Accessible–open24/7;

• Worksonmultipledevices;

• Freeuptimetogetonwithlife;

• Lowcost–previouslyonlyavailabletothewealthy;

• Onlysmallinvestmentaccountsizerequired;

• Co-creation:youdesigntheportfolioalongsidetheservice;

• Transparency––nopremiumforthepretenseofapersonalrelationship;and

• Clientcentricandpersonalized–rebalancing/riskreduction/diversification.

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Themarketingmessagesaredisseminatedthrough:

• Blogs;

• TVandprint/onlinemedia;

• Onlineadvertising;and

• Word-of-mouth,offeringexistingcustomersbonusesforrecruitingtheirfriends.

The Robo-ADviSoR MARKeTBoLu,theCEOofFutureAdvisor(nowpartofBlackRock),usedtodescribethesizeoftheopportunityforhisproductintheseterms:

“Thereare32millionmass-affluentAmericans–withassetsbetween$100,000and$1million–andonly20%haveanadvisor.60%offamilieswithmorethan$1millionininvestableassetsalreadyworkwithafinancialadvisor.80%ofourclientsneverhavehadanadvisor.Noecosystemhaseverservedthesepeople.That’sabiggapthat’sartificialandmadebyeconomics.Wewanttobringthepenetrationuptowhereitisfortheaffluent,andthatisa14-million-householdopportunity.”

Thetargetclientbaseforrobo-advisorstartupsisthetechsavvy,themature,theappfriendlyormillennialsreachingadulthoodinyear2000.

It’sthosewhopreferTwittertoreadingthenewspaperorsomeonewhobookstheirdinnerreservationviaOpenTableinsteadofcallingtherestaurant.Thosewhoresearchandactinmostsituationsinavastlydifferentlymannerfromthewaypeopledid15yearsago.Forthiscohort,thismethodofonlineengagementwillbealsotruewhenitcomestomakingfinancialdecisions.Ifitcanbedoneonline,theywilldoitonline.

Formanypeople,thequestionboilsdowntohowinvestorswanttoorganize theirfinancesandinteractwiththeiradvisors.Willtheyprefercontrolandaccessibilityof24/7onlineaccesstostatements,positions,fees,andotheraccountinformationontheirsmartphone?Orwilltheypreferaface-to-faceconversationwithafinancialadvisorwhocanprepareandtalkthemthrough afinancialplan?

Webelievethesequestionsarestrategicallyflawed.Weconsiderthatrobo-advisorsarenotaneither/orquestion.

Boththehumanandrobooptionsarerequiredtoservethedifferentprofilesofclients.Thecomplexdecisionmayalwaysrequireface-to-faceinteractionwithanotherhumanbeing,whilethebasictransactionalexperiencemayonlyrequireaself-serviceonlineprocess.

Botheco-systemscan,andwill,existtogether–oneneednotconsumetheothertothrive.

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3.3 The lAG in The uK AnD euRoPe

Robo-adviceplatformsareactiveintheUKandEurope,butthesemarketslagtheUSintheriseofrobo-advisors.ThelagintheUKispronouncedandsignificantalthoughthesignsinEuropearegenerallymoreencouraging,withGermanyleadingtheexpansionoftherobomarket.

Iftheregulatoryenvironmentweremoreaccommodating,robo-advisorscouldplayanimportantroleinservicingtheUKmarket’sadvice-gapsector,wherepeoplefallbelowtheassetlimitsrequiredtobeviableclientsinaholisticadviceprocess.

Itisestimatedthatthereis£440billion(US$682billion)ofinvestableassetsamongthe43millionadultsintheUKwhofindthemselvesintheadvice-gap.Theysaveanother£54billion(US$84billion)eachyear.

The uK IntheUK,robo-advicesystemsfaceregulatorychallengeswhichhaveundoubtedlyslowedentryintothemarket.

Thosethatdoexistoperateonlyatthelowestlevelsofrestricted,focusedorsimplifiedadvice.Theyare,basically,transactionalmachines.Robo-advisorsaspiringtoriseanyfurtheruptheladdertowardsmoresophisticatedadvice–whichincludesaportfoliorecommendation–becomecaughtinastrangeclashofregulatoryandcomplianceregimes.

Theregulator,theFinancialConductAuthority(FCA),appearstoallowonlineadviceandtowanttoencouragethedevelopmentofrobo-advisors.Butappearancescanbedeceptive.TheUKlegislationonfinancialadvicerestrictshowliberaltheFCAcanbe.

TheonerouscomplianceobligationscoupledwiththeOmbudsman’sdecisionshaveraisedtheperceivedrisksofoperatingrobo-adviceplatformsinthisjurisdictionandstifledinnovationandgrowth.Themovementfromonlineexecutiononlywebsitestorobo-advicemodelsmeanssignificantregulatoryimplications,nottomentionsignificantprofessionalindemnityinsurancecostsandfinancialservicecompensationlevies.

FinAnCiAl ConDuCT AuThoRiTY Anyoneconductingduediligenceonbuying,buildingorestablishinganautomated-adviceprocessintheUKwould,naturally,beginwiththeFCA.Theproblemisn’ttheFCAitself–yougetthesensethatthefolksattheFCAwouldhappilytickrobo-advisorsquitereadily,ifonlytheycould.TheestablishmentoftheFCAProjectInnovateisamanifestationoftheirdesiretosupportrobos.Theissueiswhetherthelegislationitselfissupportiveandfitforpurposefortheroboenvironment.TheclashbetweenwhattheFCAmightwanttoencourageandwhatcanbeachievediseasytodemonstrate.

Let’sbeginwithwhatappearstobeaseriesofgreen-lightsforrobo-advisorsfromtheFCA.

TheFCA’sDirectorofPolicy,DavidGealeisonrecordassaying:

‘Ahealthyadvicemarketisoneinwhicharangeofdifferentmodelsexistanddeveloptosuittheneedsofabroadspectrumofinvestors.WebelievethatFG15/1willgivefirmstheconfidencetoinnovatetoprovidenewstreamlinedadvisorypropositionswithaclearerunderstandingoftheirresponsibilitiesandofwheretheboundarieslie’.

‘FG’is‘FinalGuidance’andFG15/1,towhichMrGealerefers,isessentialreadingforanyonewithaninterestinrobo-advisorsintheUKorwiderEuropeanmarkets.ItsfullnameisFG15/1:RetailInvestmentAdvice:Clarifyingtheboundariesandexploringthebarrierstomarketdevelopment.

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Meanwhile,theFCAhasmadeitknownthat:

‘Awell-functioningretailadvicemarketneedsdifferentdeliverymechanismstobefullyeffectiveforthebroadrangeofpotentialinvestors.Therecouldbebenefitsfromawell-designed,low-costmethodofmeetingconsumers’straightforwardinvestmentadviceneeds.Thechallengeistoensuresuchmethodswilldelivergoodoutcomesforthoseconsumers.’

Atthesame,theFCAhasestablishedProjectInnovatetohelpnewandestablishedbusinessestointroduceinnovativefinancialproductsandservices.ThroughitsInnovationHub,theFCAoffers:

• Dedicatedteamsandcontactsforinnovatorbusinesses;

• Helpforthesebusinessestounderstandtheregulatoryframeworkandhowitappliestothem;

• Assistanceinpreparingandmakinganapplicationforauthorization,toensurethebusinessunderstandstheUKregulatoryregimeandwhatitmeansforthem;and

• Adedicatedcontactforuptoayearafteraninnovatorbusinessisauthorized.

TheFCAsaystheInnovationHub‘willidentifyareaswhereitsregulatoryframeworkneedstoadapttoenablefurtherinnovationintheinterestsofconsumers’.WehavehadquiteafewdiscussionswiththeProjectInnovateteam.Theytellus,enthusiastically,thattheyaretalkingwithalotofdifferentbusinessesthatarekeentoinnovate.

That’stherhetoric–herearethefacts.Despitealloftheapparentpositivenesstowardsinnovation,as2015drewtoaclose,notasinglenewrobo-advisorhadbeenlaunchedintheUK.

Tofindoutwhy,wemustturntothelegislation.

TheUKlegislationaccordswithdirectivesfromtheEuropeanUnion,althoughsomedoarguethattheUKhastakenaneventougherstancethattherestofEuropeislikelytodo.

Eitherway,EUdirectivessuchasMiFIDIandII,whichcomeintoeffecton3January2017,havecreatedmoreonerousstandardsandobligationswhengivingfinancialadvice.

Essentially,thepersonsellingaproductmustensurethattheadviceis‘appropriate’forthecustomer–even,insomecases,wherenoadvicewasgivenduringthesalesprocess.

Thismeansthatinsomecasesandevenforexecution-onlysalestheadvisorhastoasktheconsumerformoreinformationtohelpitdecidewhethertheconsumerhasthenecessaryknowledgeandexperiencetounderstandtherisksinvolvedinthetransaction.

Thecategoriesof‘non-complex’productswillbenarrowedunderMiFIDIIsothatthe‘appropriateness’testwillapplyevenmoreoften.

Suitabilityrequirementsapplytoadvisedservicesandportfoliomanagement.Therewillbemoreonerousobligationsoninvestmentfirmstodeterminesuitability(includingofbundledpackagesofproducts).Firmsgivinginvestmentadvicewillberequiredtodisclosewhethertheywillprovidetheclientwithanongoingassessmentofsuitabilityoftheproduct.

Periodicreportsmustbeprovidedtoclientsincludinganassessmentofthesuitabilityoftheportfoliounless,inthecaseofinvestmentadvisors,thefirmisnotcarryingoutaperiodicassessmentofsuitability.Firmsprovidinginvestmentadvicemustprovideclientswithastatementspecifyingthebasisonwhichtheinvestmentrecommendedissuitablefortheclient.

Theramificationsofthisfortherobosectorhavebeenprofound,withnooneyetpreparedtobringaroboproducttomarketunderthisregime.

IntheUKtodayoperatorsmustnavigateaminefieldof‘simplifiedadvice’versus‘limitedadvice’versus‘focusedadvice’versus‘regulatedadvice’versus‘personalrecommendation’versus‘genericadvice’.Youcanveryquicklydrowninallthe‘blah,blah,blah…’thataccompanieseachofthoseterms.

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FinAnCiAl oMbuDSMAn SeRviCeTheUK’sFinancialOmbudsmanService(FOS)isanindependentarbiterindisputesbetweenconsumersandbusinessesprovidingfinancialadvice.Eachcomplaintisdecidedonthemeritsofthematter,basedonwhattheOmbudsman–asanexpert,impartialobserver–believestobefairandreasonable.

TheOmbudsman’sdecisionsreflectthetwinthemesof‘informedconsent’and‘suitability’.TodefendaclaimbeforetheOmbudsman,thegiverofadvicemustbeabletodemonstratethat:

1. They‘knowtheirclient’byconductingadatacollectionincludingrisktolerancetesting;

2. Theyhaveadocumentedprocessforselectingsuitableinvestmentproductsbasedoninformationobtainedinstep1;

3. Theyexplainedallthedetailsandriskstotheclientandhavedocumentationtosupportthis;and

4. Theyreceivedformalacknowledgementfromtheclientthattheyhadacceptedthisinformationandtherecommendation.

FormoreinformationontheOmbudsman’srulingsrefertosection5.1AssessingaRobo-Advisor.

‘simplified advice’ ‘limited advice’

‘focused advice’

‘regulated advice’‘personal

recommendation’

‘generic advice’

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SeCTion 4 ASSeSSinG

ARobo-ADviSoR

4.1 ASSeSSinG A Robo-ADviSoR

Howarewetoassessarobo-advisor?

Thisisatop-of-mindquestionforanyoneconsideringbuilding,buyingorimplementingarobo-advisorprocess,alongwithotherquestionssuchas:

• Howdoweensurethisthingdoesn’tgetussued?

• Howdowecomplywithvariousrulestoensureregulatorsdon’tsanctionus?

• Whatframeworkorguidelinescanwepointtoinordertodemonstratethatourrobogivessuitableadvice?

CharlesSchwab’spaper“Gainingperspectiveonautomatedinvesting”putsforwardalistofhigh-levelquestionstohelpthedecision-makingprocessinconsideringtheopportunityandafirm’sreadinesstocapitalizeontherobo-advisormovement.Whilenotcomprehensive,thefollowinglistofquestionsareexamplesofwhatmightbeasked:

• Haveweturnedawayclientswhocouldhavebeenagoodfitwithourservicemodelifwehadbeenabletoreducethecostofservingthem?

• Canweincreasethenumberofprofitablerelationshipswehavebyidentifyingwaystoservesmallerclientsmoreefficiently?

• Arewecurrentlyservingclientswhoarebelowouraccountminimum(perhapsfamilyandfriendsofcurrentclients)?

• Wouldwebeinterestedinexpandingourteambyaddinganewadvisorwhosetypicalaccountsizeisbelowourfirm’saccountminimums?

• AmIopentotakingonyoungerinvestorswithsmallerportfoliosbuthighpotentialasawaytofuelfuturegrowth?

Unfortunately,therearegenerallynoclearrules,regulationsorguidelineswhenitcomestorobo-advisors.Peopleaskingthesequestionsarenotgettingalotofanswers.Theymustsiftthroughvariousdatatoinfertheirownanswers.Manyaresimplybeingleftinthedark.

Wewouldliketoshineaflashlightonthesequestions,becausewebelievethatwehaveconstructedanintelligentframeworkthatwillallowrobo-advisoryprocessestobeassessedfor:

• Businessrisk;

• Regulatoryrisk;and

• Investmentsuitabilityrisk. 

Inconstructingourframeworkwefoundthesetoolstobeuseful:

• DatafromtheUKFinancialOmbudsmanService(FOS),whichgivesinsightsintotheflawsinprocessthatoftenresultinafindingagainstafinancialservicesprovider;and

• TherecentInternationalOrganizationofSecuritiesCommissions(IOSCO)publication‘ReportontheIOSCOSocialMedia&AutomationofAdviceToolsSurveys’.

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IntheFOSdata,ourinterestliesinthecaseswheretheOmbudsmanfoundnofaultbytheserviceprovider–whatarethecommoncharacteristicsofprocessinthosecompaniesthatmeanttheyescapedcriticism?

TheIOSCOisawindowintothemindsofregulatorsaroundtheworld.Itmapstheirconcernsaboutrobo-advisorsandpresentsaseriesofred-flagstonotewhenbuilding,buyingorimplementingarobosolution.

Byputtingthetwotogetherweemergewithveryclearguidelinesabout:

1. Whatconstitutes‘best-practice’forrobo-advisors;and

2. Whatfaultsandflawscouldeasilyleadtolegalactionorregulatorysanction.

WhAT To ASSeSS

Think,foramoment,ofarobo-advisoratitsmostfundamentallevel:

1. Ausercompletesanonlineprocessaboutthemselves;

2. Therobo‘thinks’,usinganalgorithmthatisunknowntotheuser;and

3. Therobosuggestsacourseofaction.

Thestep1dataisclearlycriticaltotheentireprocess.Soitfollowsthattheremustbeaveryrobustdatacollectionframeworktoavoidthesystemsufferinga‘garbagein–garbageout’fault.Assumingtheinputdataisrobust,wemustthenturntotherobo’s‘thought-process’.Whatrulesandprinciplesdoesthealgorithmapply,andwhy?

Wefind‘suitability’tobeaveryusefuloverridingtermforestablishinganassessmentframework,asitcapturesthetwocriticalissues:

1. Haveyoumadesuitableinquiriesofyourclienttoknowenoughaboutthemtobeablemakearecommendationrelevanttotheircircumstance?

2. Istherecommendationyoumakesuitabletothem?Thestandardproxyforsuitabilityistheclient’sriskprofilewhichincludestheperson’srisktolerance–doestherecommendationaccordwiththeriskprofile?Therearehugevariancesinhowdifferentpeopleassessrisktolerance.Someassessmentsareflawedandareoflittleuseindeterminingsuitability.

Withtheprincipleofsuitabilityinmind,inthenextchapterweminetheFOSandIOSCOdataforindicatorsofhowanindependentobserverandtheglobalregulatorsdetermineifsuitabilitystandardshavebeenmet.

Think, for a moment, of a robo-advisor at its most fundamental level: 1. A user completes an online process about themselves; 2. The robo ‘thinks’, using an algorithm that is unknown to

the user; and3. The robo suggests a course of action.

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SeCTion 5 The Robo RelevAnT

ReGulAToRY lAnDSCAPe

5.1 AnAlYSiS oF The FinAnCiAl oMbuDSMAn SeRviCe CoMPlAinTS DATA

Financialbusinessesenteringtherobo-advisorspacewillbeinterestedtoknowandunderstandthefinancialrisksinvolved.AnimportantpieceofthejigsawpuzzleistheFinancialOmbudsmanService(FOS).

TheFOSwasestablishedin2001undertheprovisionsoftheFinancialServicesandMarketsAct2000tohelpsettledisputesbetweenconsumersandUK-basedbusinessesprovidingfinancialservices.ItisimportanttoreviewtheattitudeandapproachtakenbytheFOSinitswork.TheFOSstatesthatthelawrequiresittodecideeachcomplaintonacase-by-casebasisandusingitsdiscretiononwhatitbelievestobefairandreasonable.Indoingso,theFOSrulesrequireittotakeaccountofthelaw,rulesandgoodpracticeintheindustry.TheFOSapproachistoaskquestions,listentobothsidesofthestoryandthendecideeachcaseonitsindividualfactsandmerits,notonhowcleverlyorpersuasivelyeithersidearguestheir case.

OurreviewofasampleoftheFOSdatahighlightsthattherearecommonpatternsthathaveimportantimplicationsforrobo-advisors.Complaintsthatarenotupheldtendtohavethefollowingincommon:

• Evidenceofwell-documentedadviceincludingexplanationofchargesessentiallyleadingtotheabilitytodefendtheadvisor’srecommendations;

• Evidenceofdocumentedclientacceptance–manyexamplesofcomplaintsarerefutedbytheclient’sdocumentedacceptanceofrecommendations;

• Demonstrateduseofrecognizedriskprofilingtoolsandaclearandwell-documentedinvestmentsuitabilityprocess;and

• Evidenceoffollowinganonlineprocess–therearemanyexamplesoftheOmbudsmanreferringtotheabsenceofsupportingevidencefromthecomplainantwithregardstoonlinesystems.TheFOSstatesthatitsdecisioninacaseismadeontheciviltestofthe“balanceofprobability”andthiscanbeachievedthroughthepresenceofanestablishedandwell-runonlinejourneyorprocessforallconsumersalike.

TheabsenceofanyoneofthesefourpointsoftenmeansthatanFOScomplaintmaybeupheld.Itisworthnotingthatacommonmistakeleadingtoacomplaintbeingupheldistheroleofanadvisorindocumentingaprocess(suchasdefiningthecomplainant’sriskprofile)butthenrecommendingaspecificinvestmentthatdoesnotmeettheprofile.

ThattheFOSmayarriveatdifferentoutcomesonseparatecasesshouldnotbeseenassurprising.ItisnotaquestionofinconsistencybutamatteroftheFOSlookingateachcomplaintindividuallyandmakingadecisiononwhatitbelievesisfairandreasonableinthecircumstancesofthatparticularcase.TheremaybesurfacesimilaritiesbetweensomecomplaintsbutwhenlookedatindetailtheFOSoftenprovideverydifferentoutcomesbasedonsimilarinputs.

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Regularandindependenttestingofprocess,algorithmsandriskprofilingisimportantparticularlytoremoveanysystemic(orindeedsystematic)risk.

Relevanttorobo-advisors,theFOSexplainsitsapproachtodealingwithcomplaints:

• “Wearealreadyusedtodealingwithcomplaintsaboutmanyfinancialproductswherethereisnospecificrequirementinrelationto‘suitability’or‘knowyourcustomers’.Insuchcases−aslongastheyhavenotbeenmisled−weexpectcustomerstoberesponsiblefortheirownchoice”.

• “Weassessanycomplaintwedealwithinvolvingthesaleofa‘stakeholderproduct’ontheunderstandingthatthecustomerreceived‘basicadvice’.Wewillnot,forexample,expecta‘factfind’tohavebeencompleted–ortheadvisortohavemadedetailedenquiriesto‘knowthecustomer’.Aswithotherproducts,wetaketheregulator’srulesandguidanceintoaccount.Wealsolookatgoodindustrypractice”.

• “Simplifiedadvice’processesmustcomplywiththesameregulatoryrequirementsasthoseinvolvingfulladvice–includingtherequirementthattheadvicehastobe‘suitable’.Butinanycomplaintswemightreceive,wewouldjudgetheadviceinthespecificcontextinwhichitwasgiven.Sowewouldnotexpecta‘fullfact-finding’exercise.Butwewouldlookatthequestionsaskedandtheoptionsopentotheparticularcustomerconcerned”.

• “Wherethe‘simplifiedadvice’involvesanautomatedprocess,wewouldlook,aspartofourconsiderationofanycomplaint,atwhethertherewasagoodrecordoftheinformationthecustomergaveandthechoicestheymade”.Whichinfersifthisispresentthenthecomplaintislesslikelytobeupheld.

“Where the ‘simplified advice’ involves an automated process, we would look, as part of our consideration of any complaint, at whether there was a good record of the information the customer gave and the choices they made”.

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5.2 AnAlYSiS oF The Robo RelevAnT ReGulATion

TheInternationalOrganizationofSecuritiesCommissions(IOSCO)isatradebodymadeupofseniorrepresentativesfromthevariousregulatorsaroundtheworld.TheFinancialConductAuthority(FCA)actingheadTraceyMcDermottisinvolved.TheIOSCOcoordinatesandsharesexperiencesregardingrobo-advisors.

Theirrecentpublicationisthe“ReportontheIOSCOSocialMediaandAutomationofAdviceToolsSurveys”.

Thevariousregulatorswhoparticipatedidentifiedanumberofconcernsrelatedtotheuseofautomatedtoolsandthereportsuccinctlydemonstratestheircoordinatedthinking.Theregulatorsareconcernedthat:

• Firmsmaybeclassifyingtheoutputofautomatedadvicetoolsassomethingotherthanarecommendation(e.g.,non-personalpromotionalmaterial)toavoidregulationsortoengageinregulatoryarbitrage;

• Firmsmaynotberegularlyupdatingcustomerinformationusedforasuitabilityanalysistotheextentrequiredbygoodpractice;

• Customersmaynotbeprovidingsufficientinformationfortheautomatedtooltoprovideappropriateresponses(consumersmaybe‘gaming’thesystemorjustactinginignoranceoftherelevanceofprovidingthecorrectanswerforagoodoutcome);

• Customers,potentiallybelievingthattheyhavereceivedadvice,goontobuyriskier,unsuitableproducts;

• Theremaybeconflictsofinterestbetweenafirmanditscustomersresultinginanautomatedtoolpotentiallymakingrecommendationsthatfavorthefirmatitscustomers’expense(e.g.,recommendingproprietaryproducts,churning,favouringpreferredclients);

• Firmsmaylacksufficientinternalcontrolstoadequatelysupervisetheuseofautomatedadvicetools‘inthewild’;

• Whetherfirmsareorarenotprovidingtheircustomerswithsufficientinformation/disclosureabouttheirusingautomatedtools(e.g.,instructionsandriskdisclosures);and

• Whetherfirmsareproperlyapplyingsuitabilityrequirementswhentheyrecommendcomplexorilliquidproductstoretailcustomers.

TheIOSCOmemberregulatorsalsoidentifiedthreeareaswheretheybelieveadditionalguidancefromtheIOSCOwouldbehelpfulinthefuture:

1.Bestpracticesforintermediariesprovidingadviceviaautomatedtools(e.g.,howbesttocomplywithsuitabilityobligations).Thiswouldincludesuchthingsas:

• Thecircumstancesunderwhichtheoutputfromanautomatedtoolonacustomerdirected/execution-onlyplatformshouldbesubjecttotheapplicablesuitabilityobligations(ifpermissibleundertheapplicablelegalframework);

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• Incomplyingwithsuitabilityobligations,howtobestreflectaninvestor’sriskpreferenceinanautomatedtool;

• Whether,andifso,afirmcansatisfyitssuitabilityobligationsbymechanicallymatchingacustomer’srisktolerancewithaproductrating;and

• Can/shouldafirmexecuteatraderecommendedbyanautomatedtool? 

2.Whatprinciplesshouldanintermediaryconsiderwhendesigninganautomatedtool?ThiswouldincludesuchthingsasITintegrity,includingrecordkeepinganddatastorage;identitytheftandotherprivacyconcerns;andthetypesofandpotentialrisksassociatedwithautomatedtools,includingthemethodologies/algorithmsthetoolsuse.

3.Whatprinciplesshouldregulatorsconsiderwhenregulatingintermediariesthatuseautomatedtools?Thiswouldincludesuchthingsashowtoimprovecommunicationamongregulatorstoenhancesharingtheirexperiencesinregulatingautomatedtools(e.g.,onlineaccesstoregulators’relevantrules,regulationsandguidelines);identifyingrisksuniquetoprovidingadvicethroughautomatedtoolsthatmayrequiretargetedregulation(e.g.,testingandex-postreviewofrecommendations);andprovidingguidanceonthetypesofandpotentialrisksassociatedwithautomatedtools,includingthemethodologies/algorithmstheyuse.

TheIOSCOreportclearlyhighlightsthattheuseofautomatedadvicetoolsisgrowingaroundtheworld.FinancialintermediariesareusingthesetoolstoassistwiththeirsuitabilityandthevariousKnowYourCustomer(KYC)obligationsputuponthem.TheIOSCOfoundthatwhenfinancialintermediariesmakerecommendations,thevastmajorityoffirmsdosowithrespecttoassetclassesandthatinrespectofspecificproducts,thencollectiveinvestmentschemes,mutualfunds,ETFsandequityclassesarethemostcommonassetclassesrecommended.

TheIOSCOreportdemonstratesthatcurrentlynoregulatorthatrespondedtothesurveyindicatedthatitprohibitstheuseofautomatedadvicetoolsbutitalsohighlightsthatveryfewregulatorshavespecificrulesorguidancerelatedtotheiruse.Rather,mostregulatorsrelyontheirstandarddirectivesongeneralsuitability,disclosure,supervisionandrecordkeepingrules.

IntheUK,theFCAisnoexceptiontothis.TheFCA,however,hasaggregatedthevariousstrandsoftheregulationrelevanttorobo-advisorsintheirrecentpublicationFG15/1:“Clarifyingtheboundariesandexploringthebarrierstomarketdevelopment”(January2015).Thispaperisessentialreadingforthoseconsideringlaunchingarobo-advisorpropositionintheUKorindeedEuropeasrelevantMiFIDisincluded.

TheFCA’sattitudeisthatitrecognizesthat“awell-functioningretailadvicemarketneedsdifferentdeliverymechanismstobefullyeffectiveforthebroadrangeofpotentialinvestors.Therecouldbebenefitsfromawell-designed,low-costmethodofmeetingconsumers’straightforwardinvestmentadviceneeds.Thechallengeistoensurethatsuchmethodswilldelivergoodoutcomesforthoseconsumers”.

Tothatextentandaspreviouslydiscussed,theFCAhasestablishedProjectInnovate.TheauthorhasbeenindiscussionswiththeProjectInnovateteamandwhiletheFCAacknowledgesanumberoforganizationshaveengagedwiththeProjectInnovateteam,therehasnotbeen,atthetimeofwriting,arobo-advisorlaunchintheUK.Weawaitwithbatedbreaththefirstofthese.

TheFCADirectorofPolicyDavidGealehasfurtherstated:“Ahealthyadvicemarketisoneinwhicharangeofdifferentmodelsexistanddeveloptosuittheneedsofabroadspectrumofinvestors.Webelievethat(FinalGuidanceJan2015)willgivefirmstheconfidencetoinnovatetoprovidenew,streamlinedadvisorypropositionswithaclearerunderstandingoftheirresponsibilitiesandofwheretheboundarieslie.”

TheFCAhighlightsthetypesofadvicethatmayberelevantforthoseoperatingrobo-advisormodels.

‘Simplifiedadvice’isnotadefinedtermintheFCAHandbookbuthasbeenadoptedbytheFCAtodescribestreamlinedadviceprocessesthataimtoaddressstraightforwardneedsofconsumers.Itisusedtomeanalimitedformofadviceinthatitisfocusedononeormorespecificneedsanddoesnotinvolveanalysisoftheconsumer’scircumstancesthatarenotdirectlyrelevanttothoseneeds.Theoutcome,therefore,ofasimplifiedadviceprocessmaybeaspecificrecommendation.Thisguidanceistargetedatsimplifiedadviceprocessesthatrecommendretailinvestmentproducts.

Fromaregulatoryperspective,simplifiedadviceisaformof‘restrictedadvice’becauseitdoesnotconsiderallretailinvestmentproductsthatmaybesuitableforconsumers.Soitneedstocomply

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withtherequirementsforrestrictedadvice.TheFCAstatesthatasimplifiedadviceprocessmaybeappropriateforconsumerswhomeetthefollowingcriteria:

• Theyhavetheirpriorityneedsmet,thatis,theydonotneedtoreduceexistingdebt,theyhaveadequateaccesstoliquidcash(i.e.savings),andhaveanycoreprotectionneedsmet;

• Theyhavesomedisposableincomeorcapitalthattheywishtoinvest;and

• Theydonotwantaholisticassessmentoftheirfinancialsituation,butratheradviceonaspecificinvestmentneed.

‘Focusedadvice’isatermthattheFCAhastakenonboardreplacingapreviouslyusedterm‘limitedadvice’.FocusedadviceisalsonotdefinedintheFCAHandbookbutitisusedtodescribeasituationwheretheclientrequeststhatafirmonlygivespersonalrecommendationsrelatingtoaspecificneed,designatedinvestmentorcertainassets.Thereforesimplifiedadvicehassomesimilarcharacteristicstofocusedadviceinthattheadviceprocessisfocusedononeormorespecificneeds.

Thekeydifferencebetween‘focusedadvice’and‘simplifiedadvice’isthatthefocusedadviceinvolvestheclientstipulatingtheboundariesoftheservicetheywishtoreceive.So,withautomated,simplifiedadviceprocesses,thefirmissettingouttheboundariesoftheserviceitprovides.

Aconcernforfirmsmaybethatacustomergoesthroughtheautomatedprocessbutthentransactswithanotherorganizationfollowing(orbasedon)theadvicerecommendedbytheoriginalprocess.TheFCAdealswiththisbystatingthatinrelationtothefirmsgeneralnon-statutoryliabilities(butnotitsliabilityunderCOBSrulesschedule5section138DforbreachoftheCOBSrules),afirmcouldincludeaprovisioninthetermsandconditionsofthesimplifiedadviceprocessthatlimitsitsliabilityorexcludesliability(bothcontractualandintort)ifthecustomerdoesnotbuytheproductrecommendedintheprocessfromtheoriginalfirm.Obviously,theexclusionclausemustcomplywithcommonlawandstatutoryrequirementssuchasthereasonablenesstestundertheUnfairContractTermsAct1977andtheUnfairTermsinCustomerContractsRegulations1999.IntheviewoftheFCA,aprominentandclearexclusionclauseislikelytobeeffectiveinthesecircumstances(althoughthisisultimatelyadecisionforthecourt).

TheFCAhasrestateditsdefinitionsof‘regulatedadvice’,‘personalrecommendation’and‘genericadvice’.UndertheMiFIDdefinition,regulatedadviceisapersonalrecommendationrelatingtooneormorespecificinvestments;otherwiseitisclassifiedgenericadvice.Informationwhichmightbeconstruedasadvicebutnotrelatingtospecificinvestmentsanddeliveredtothegeneralpublicortoexistingcustomersintheformofanewsletterisnotlikelytobeconsideredregulatedadvice.Anexampleofthisisablogonthepotentialupsideinaparticularinvestmentsector.ItisimportanttorememberthattheFCA’sinvestmentsuitabilityrulesonlyapplywhereapersonalrecommendationismade.

Note:executiononlyistechnicallynotadviceandthereforeisoutsideofthisWhitePaperandtherobo-advisorremitasitisaserviceconsistingoftheexecutionand/orreceptionandtransmissionofclientordersrelatingtoparticularfinancialinstrumentsattheclient’sinitiative.Thefirmdoesnotgiveanyadviceoninvestmentsorassessappropriateness.

44

5.3 AnAlYSiS oF Robo RelevAnT MiFiD i AnD ii

TheEUDirectiveMiFIDIIisworthvisitinginrelationtorobo-advice.Itiscomingintoeffect3January2017,andcreatesmoreonerousobligationsintheformofan‘appropriateness’testfor‘non-advisedsales’.Thismeansthatinsomecasesandevenforexecutiononlysales,theadvisorhastoasktheconsumerformoreinformationtohelpitdecidewhethertheconsumerhasthenecessaryknowledgeandexperiencetounderstandtherisksinvolvedinthetransaction.

Thecategoriesof‘non-complex’productswillbenarrowedunderMiFIDIIsothatthe‘appropriateness’testwillapplyevenmoreoften.

Suitabilityrequirementsapplytoadvisedservicesandportfoliomanagement.Therewillbemoreonerousobligationsoninvestmentfirmstodeterminesuitability(includingofbundledpackagesofproducts).Firmsgivinginvestmentadvicewillberequiredtodisclosewhethertheywillprovidetheclientwithanongoingassessmentofsuitabilityoftheproduct.

Periodicreportsmustbeprovidedtoclientsincludinganassessmentofthesuitabilityoftheportfoliounless,inthecaseofinvestmentadvisors,thefirmisnotcarryingoutaperiodicassessmentofsuitability.

Firmsprovidinginvestmentadvicemustprovideclientswithastatementspecifyingthebasisonwhichtheinvestmentrecommendedissuitablefortheclient.

45

SeCTion 6 biblioGRAPhY

AnDReSeARCh linKS

6.1 biblioGRAPhY AnD ReSeARCh linKS

1. http://www.fca.org.uk/static/documents/finalised-guidance/fg15-01.pdf 2. https://www.fca.org.uk/news/guidance-consultations/gc14-03 3. https://www.fca.org.uk/static/documents/guidance-consultations/gc14-03.pdf 4. https://www.fca.org.uk/static/documents/handbook/readers-guide.pdf 5. http://www.fca.org.uk/static/documents/thematic-reviews/tr14-10.pdf 6. http://www.fca.org.uk/your-fca/documents/thematic-reviews/tr14-10 7. http://www.fca.org.uk/your-fca/documents/thematic-reviews/tr14-10 8. https://www.fca.org.uk/firms/firm-types/project-innovate 9. http://www.fca.org.uk/static/pubs/guidance/fg12-10.pdf 10. https://www.fca.org.uk/news/fs14-2-project-innovate-call-for-input-feedback-statement 11. http://www.out-law.com/en/articles/2014/july/fca-seeks-to-clarify-what-constitutes-retail-

investment-advice/ 12. http://www.pinsentmasons.com/en/people/legal-directors--consultants/tobin-ashby/ 13. http://www.professionaladvisor.com/professional-advisor/news/2389862/fca-tweaks-

guidance-on-what-constitutes-advice 14. http://www.esma.europa.eu/system/files/10_294.pdf 15. March2002articlebyRichardJ.Koretoin“FinancialPlanning”magazine,titled“Robo-

advisor:Inanewworldofintense401(k)anxietybroughtaboutbytheEnronfiasco,theonlyhandinvestorsmayhavetoholdmaybedigital.”

16. http://www.businessinsider.com/where-robo-advisorAdvisor-started-2014-9#ixzz3YMPaPAsm

17. http://www.businessinsider.com/robo-advisorsdvisors-grow-quickly-2014-7#ixzz3YMQAMLKs

18. Britonssuffersavingscushionshortage,NationalSavingsandInvestments(26June2011) 19. Mintel,ConsumersandFinancialAdviceUKApril2014 20. http://www.esma.europa.eu/system/files/10_293.pdf 21. http://www.fsa.gov.uk/pubs/guidance/fg11_05.pdf 22. http://www.corporateinsight.com/about-us/in-the-news/3929-robo-advisorsdvisors-now-

manage-over-36-more-money-than-they-did-3-months-ago.html 23. http://www.cassknowledge.com/sites/default/files/article-attachments/the-guidance-gap.pdf 24. http://www.cass.city.ac.uk/__data/assets/pdf_file/0016/202336/The-impact-of-RDR-Cass-

version.pdf 25. https://www.fca.org.uk/static/documents/research/advice-gap-analysis-report.pdf 26. https://medium.com/@tanayj/the-state-of-consumer-fintech-8ae5a1644b5b 27. http://research.prudential.com/view/page/rp/31125?doc=NRRILP&bu=GC&ref=Newsroom

&cid=NewsRelease 28. http://www.ons.gov.uk/ons/rel/rdit2/ict-activity-of-uk-businesses/2012/index.html 29. AutomatedInvestmentAdvisorsGlobalMarketReview2015 30. CorporateInsight(2014),Nextgenerationinvesting:Onlinestartupsandthefutureof

financialadvice,FinalStudyPreview 31. FidelityInvestments(2014),DiggingintoDigitalAdvice:Lessonsfromnewadvicemodels

meanpotentialnewopportunitiesfortraditionaladvisors,Whitepaper. 32. InvestmentNewsResearchinpartnershipwithBlackRock

47

33. http://www.investmentnews.com/article/20150524/free/305249989 34. http://data.investmentnews.com/ria/profile/104510 35. MyPrivateBanking.com. 36. http://techcrunch.com/2015/03/03/wealthfront-now-manages-more-

than-2-billion-in-client-assets/#.2bzwpp:5Saj 37. http://www.iosco.org/library/pubdocs/pdf/IOSCOPD445.pdf 38. http://www.investmentnews.com/article/20150604/FREE/150609958/

pershing-taps-marstone-partnership-to-debut-first-advisor-focused?NLID=daily&NL_issueDate=20150604&utm_source=Daily-20150604&utm_medium=email&utm_campaign=investmentnews&utm_term=text

39. http://www.investmentnews.com/article/20150226/FREE/150229920/envestnet-acquires-tech-company-upside

40. http://www.investmentnews.com/assets/docs/CI99771528.PDF 41. http://www.goldmansachs.com/our-thinking/pages/millennials/ 42. http://www.ey.com/Publication/vwLUAssets/Advice_goes_virtual_in_

asset_management/%24FILE/ey-digital-investment-services.pdf 43. http://www.medscape.com/viewarticle/822956 44. http://invest.events/wp-content/uploads/2015/06/Invest15-Hedges.pdf 45. http://www.moneymarketing.co.uk/lucian-camp-the-d2c-market-is-in-deni

al/?cmpid=pmalert_1321557&sid=MM00003&utm_medium=email&utm_source=newsletter&utm_campaign=mm_daily_news

46. http://www.investmentnews.com/article/20150827/FREE/150829915/in-the-wake-of-BlackRocks-futureadvisor-deal-which-independent-robo?utm_source=Morning-20150828&utm_medium=email&utm_campaign=investmentnews&utm_term=text

47. https://www.kitces.com/blog/pfm-and-account-aggregation-acquisitions-in-advisor-fintech-reaches-a-new-level-as-envestnet-buys-yodlee-for-590m/

48. https://www.kitces.com/blog/BlackRock-acquires-futureadvisor-for-150m-as-yet-another-robo-advisor-pivots-to-become-an-advisor-fintech-solution/

49. http://advisorservices.schwab.com/public/file/P-7751450/Automated_investing_digest_final.pdf

50. http://www.investmentnews.com/article/20150901/BLOG16/150909998/why-a-big-market-decline-wont-kill-the-robo?NLID=daily&NL_issueDate=20150901&utm_source=Daily-20150901&utm_medium=email&utm_campaign=investmentnews&utm_term=text

51. http://m.professionaladvisor.com/professional-advisor/news/2424887/nutmeg-seeks-disrupter-to-lead-advice-expansion?utm_medium=email&utm_term=&utm_content=Nutmeg%20seeks%20%27disrupter%27%20to%20lead%20advice%20expansion&utm_campaign=IFA.PM_Update_RL.EU.A.U&utm_source=PA.DCM.Editors_Updates

52. http://www.businessinsider.com/where-robo-advisor-started-2014-9?IR=T 53. http://www.investmentnews.com/article/20150908/BLOG02/150909932/

now-is-the-time-to-evolve-your-firms-technology?NLID=daily&NL_issueDate=20150908&utm_source=Daily-20150908&utm_medium=email&utm_campaign=investmentnews&utm_term=text

54. http://foxfinancialplanningnetwork.com/robo-shield-whitepaper

48

SeCTion 7 AnAlYSiS oF

inDuSTRY PARTiCiPAnTS

Region Company budget-ing Tool

Financial Planning

education / information

Retirement Planning

and invest-ment Wrap-

pers

Social Me-dia Centre investment Community

Robo-advisor

White label

Capability

Direct invest-ment

without advice

Funds managed and number of

clients accounts

Average account

size

Fee rate for this size of

account

Fee per client

Revenue estimate

Australia BigFuture 4 4 4

Australia Brightday 4

Australia FinaMetrica 4 4 4 4

Australia MOVO 4 4

Australia Pocketbook 4 4 Nil

Australia SelfWealth 4 $240

Australia Stockspot 4 4 0.294% - 0.387%

0 - $77

Canada Nest Wealth 4

Canada Share Owner 4 4 4 $40 per order

Canada Smart Money Investments

4 0.45%

Canada Wealth Bar 4 4 4 4 0.35% - 0.6%

Canada Wealth Simple 4 4 0.35% - 0.5%

Others 8 Securities 4 4

UK fiveraday 4 4 4 around 45 fundsFUM £1.25m

£25 - 30k average 0.79%

UK Hargreaves Lansdown

4 4 4 4 4 4 0.1% - 0.45%

UK Money on Toast 4 4 4

UK Nutmeg 4 4 0.3% - 1.0%

UK Parmenion Interact

4 4

UK Wealth Horizon Powered by Par-menion

UK Wealth Wizard 4 4 4

USA Acorns 4 4 0.25%

USA Angellist 4 4

USA Asset Builder 4 US$616,216,000 in 2,413 client accounts

$255,374 0.43% of AUM

$1,098 $2,649,735

USA Betterment 4 4 4 US$1.3 billion in 72,757 client ac-

counts

$18,868 0.25% AUM $47 $3,431,948

USA Blooom 4 4 4 4 US$26,949,932 in 205 client accounts

$131, 463 $15/month or $180/ year

$180 36,900

USA Covestor 4 US$27,128,583 in 485 accounts

$55, 935 (assuming self-directed

subscrip-tion fees)

at 0.25% of AUM

$140 $67,821

USA Financial Engines

4 4 4 4 US $88.2 billion across 835,107

accounts

$105,615 for professional management

is 0.75% AUM

$792 **

USA Financial Guard 4 4 4 4

USA FinMason 4 4 Nil

USA Future Advisor 4 4 4 4 US$232,124,128 on discretionary basis in

3,460 accounts

$67, 088 0.50% AUM $335 $1,160,622

USA Hedgeable 4 4 4 4 US$2,555,639 in 27 client accounts

$94,653 0.70%AUM $663 $17,889

USA iQuantifi 4 4 4 4 4

USA Jemstep 4 4 4 4 4

USA LearnVest 4 4 4 4 4 4

USA Lift Off 4 4 4 4 4 4

50

Region Company budget-ing Tool

Financial Planning

education / information

Retirement Planning

and invest-ment Wrap-

pers

Social Me-dia Centre investment Community

Robo-advisor

White label

Capability

Direct invest-ment

without advice

Funds managed and number of

clients accounts

Average account

size

Fee rate for this size of

account

Fee per client

Revenue estimate

USA MarketRiders 4 4 4 4 4 4

USA Marstone 4 4 4 4 4

USA Mint 4 4 4 4 4 4

USA Motif Investing 4 4 4

USA Mpower 4 4 4

USA NestEgg Wealth 4 4 4 4

USA Open Folio 4

USA Personal Capital 4 4 4 US$861,759,448 in 6,571 accounts

$131,146 0.89%AUM $1,167 $7,669,667

USA Rebalance IRA 4 4 $225 million across 425 accounts

$529,412 0.5% AUM $2,647 $1,125,001

USA Robinhood 4 4 4

USA Schwab Intel-ligent Portfolios

4 4

USA SheCapital

USA SigFig 4 US$59.5 million across 672 accounts

$88,542 0.5% AUM $443 $297,501

USA StockTwits 4

USA Trade King Advisors

4 4 4 0.25% - 0.50%

USA Upside 4 4

USA Vanguard Personal

Advisor Service

4 4 * 0.30%

USA Wealth Front 4 4 4 US$1,702,872,811 via 21,450 accounts

$79,388 0.25% but fee waiver on first $10k of

assets

$173 $3,720,932

USA Wise Banyan 4 US$20,281,965 via 2,762 accounts

$7,343 (assume customised

portfolio manage-ment) at

0.5%AUM

$37 $101,407

Wider Europe

Cashboard 4 10 % on the previous high-water

mark

Wider Europe

EasyFolio 4 4

Wider Europe

Finance Scout 24

4 4 4 0.5% - 1.25%

Wider Europe

Money Farm 4 4 4 4 4 4

Wider Europe

Money Meets 4 4 Nil

Wider Europe

Quirion 4 0.48%

Wider Europe

Sutor Bank 4

Wider Europe

Swissquote Ep-rivate Banking

4 4 4 0.95% - 1.25%

Wider Europe

True Wealth 4 0.50%

Wider Europe

Vaamo 4 0.49% - 0.99%

Wider Europe

wikifolio 4 4

* Hybrid

51