The automated financial advice market is ripe for mergers and acquisitions, according to several key stakeholders, as a variety of startups struggle to reach a critical mass of clients.

A report from Juniper Research earlier this year estimated that total assets under management by so-called robo advisers will increase twelve-fold to reach $4.1 trillion in four years’ time, up from an estimated $330 billion in the past 12 months.

The research suggested that robo advisers are broadening the appeal of the wealth management market, with smartphone apps making the investment process more appealing to the Millennial age group. The only problem with this demographic is that they generally have far smaller amounts of investable assets than those traditionally targeted by investment advisers.

Meanwhile, a report commissioned by Objectway and conducted by Compeer - with interviews and online questionnaires among UK wealth managers - found that 70 per cent of such firms are prioritising investment in digital technologies this year.

Regulatory scrutiny

Joe Woodbury, director of investment management solutions at regulatory infrastructure firm Lawson Conner, said that with the Financial Conduct Authority announcing that half of the companies in the first wave of its advice unit have either launched a low-cost advice service, or will be doing so imminently, there will soon be plenty to choose from.

“In a bid to close the gap between those who need advice and those who can afford it, the FCA launched its Financial Advice Market Review (FAMR) to investigate the opportunities and the challenges that automated advice can bring,” he explained.

Since the FAMR opened the floodgates in 2016, the market has rapidly expanded in the UK, leading the regulator to conduct a firm-by-firm review, splitting them into seven offering automated online discretionary investment management (ODIM) - where the client has given responsibility to invest on their behalf on an ongoing basis - and a further three providing retail investment advice exclusively through automated channels. Further reviews are expected later in 2018.

The FCA found disparities in service and fee disclosures, weaknesses in identifying and supporting vulnerable consumers, and little consideration of auto advice-specific risks in firms’ governance processes.

Crucially, both ODIMs and fully-automated firms were found to not be properly evaluating client knowledge and experience, investment objectives and capacity for loss in suitability assessments. Some services lacked adequate fact finding and 'know your client' focus, instead relying on assumptions about clients.

“In general, we were not satisfied with the strength of information gathering about clients' financial circumstances,” stated the FCA. “We expect automated investment services to meet the same regulatory standards as traditional discretionary or advisory services.”

Firms were provided with specific feedback and the FCA reported that many made significant changes to disclosures and suitability processes.

“The market for both ODIM and auto advice services remains at an early stage, with a number of firms expected to launch services over the coming year,” the regulator stated. “We continue to encourage innovation in automated investment services, but while this is an evolving market, our rules on suitability of advice apply regardless of the medium through which the service is offered.”

Winners and losers

Manuela Rabener, chief marketing officer and UK co-founder at Scalable Capital, stated that healthy competition will separate the winners from losers in this sector.

“As in other digital sectors before, the companies that survive will be those with a clear USP rather than a ‘me too’ proposition,” she commented. “Some leaders are clearly emerging and having gained traction quickly, which will give them an advantage over companies that enter the market now.

“Incumbents are very actively monitoring the space and working on their digital propositions too, so I'm sure we'll see some transactions in the market this year and in the years to come,” Rabener added.

She also took aim at others in the space, when describing what Scalable Capital’s differentiating factors are. “It's our focus on using technology for all aspects of our business, rather than just having a fancy website, and in particular our use of a tech-enabled investment process for the benefit of our customer's investment experience.”

Giovanni Daprà, chief executive and co-founder of Moneyfarm, said that only in the last year have incumbent banks cottoned on to the opportunities for offering retail investment to existing customer bases. Meanwhile, several investment platforms have opted out of targeting the customer directly and gone after a more business-to-business model.

“You now only have a handful of digital wealth managers in the UK going directly to the customer, of which Moneyfarm is one. Competition, therefore, is constantly evolving in the market presenting both opportunities and challenges,” he commented.

Daprà said the business model is sound, given conventional financial thinking suggests getting updated investment advice every 12-18 months at an average cost of around £500 per hour with an independent financial adviser (IFA).

“This isn’t something many want to afford. Whereas, our continuous advice offering is included in our management fee and can be done in five minutes and on-the-go,” he added.

Traditional IFAs versus robo advisers

Lester Petch, chief executive of TAM Asset Management, explained that his ‘robo’ offshoot FinchTech came about as a happy accident. Offered to IFAs as a non-advised alternative to help fill the gap for potential clients that don’t need to pay for the full service, it is a white-label portal that can be imbedded in an adviser’s website, linking through to an automated risk questionnaire and eventually TAM fund options.

“So while other digital wealth managers are trying to compete with IFAs, we’re synergistic,” he explained, suggesting that robo advisers and their human counterparts may clash at some point in the near future.

“I think there needs to be consolidation, as almost everyone is losing money today,” stated Petch. “Today’s ‘limited pool’ is tomorrow’s ‘norm’, and while that pool of clients will undoubtedly grow, if all the propositions are similar then it’s going toward saturated.”

Petch also took issue with the default term that has emerged for the industry, pointing out that the majority of players still use human intervention at several points in a customer’s investment journey - be that call centre assistants, investment teams and financial advisers.

“Robos are a misnomer and was the early naming convention which I feel is generally outdated. There is nothing robotic about it. It is better described as digital straight-through processing,” he added.

Rabener from Scalable Capital noted that the focus of most robo startups has not been on the traditional IFA patch, as it’s limited to a niche service for a small fraction of the population that is either wealthy, or have complex financial situations due to having worked in multiple countries.

“IFAs already cater for their needs pretty well, given that these investors are likely to be able to afford their hourly rates. Startups typically first focus on mass-market applications and on making services accessible that were cost-prohibitive in the past,” she pointed out.

The Finance & Technology Research Centre’s director Ian McKenna suggested that robo advisers are actually taking more money out of the direct-to-consumer, self-service side of the market - “the likes of Hargreaves Lansdown” - rather than directly from traditional financial advisers.

As for the sector’s future, he commented: “Those robos that have had a capital injection will be alright for now, but when the market finally has a correction, investors may start questioning what’s been done with their money – I think there’s one more round of acquisitions coming.”

Lisa Caplan, head of financial advice at Nutmeg - one of the UK’s first online wealth managers in 2012 - said that in the last few years there have been new startups, providers from overseas and the traditional players all entering the market with varying propositions.

“We believe there is a role for independent online wealth managers that are truly offering a different service for customers, but it has to be more than offering traditional wealth management services through a website,” she stated. “We believe the future of wealth management is digital and there are no signs that investors or the industry are planning on taking steps backward.”

Caplan added that she expects to see innovation be the sector’s defining factor in the future. “It’s not just about digitising what we do now, but increased use of artificial intelligence and machine learning will fundamentally change our business and the way we serve customers.”

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