Instead of arguing over whether a human or a robot can offer better advice, Mike Roberts suggests more thought should be given to what the combination of skilled advisers and well-designed technology could achieve
Robo-advice is arguably one of the hottest topics in the financial services industry. Money is flowing into technology that is seeking to deliver the simplest of solutions with the minimum clicks. Venture capitalists are falling over themselves to get in on the next start-up while the old guard are scrambling to make sense of the ‘millennial' generation's financial habits, believing these individuals will not want face-to-face advice.
So far, the evidence for robo-advice delivering a financial nirvana for technology investors and financial services providers is not wholly obvious - particularly when you do the maths on money raised, cost of service and assets under management (AUM).
Let's take an example from across the Atlantic. In October 2015, the US-based robo-advice provider Wealthfront raised $64m (£44.2m) at a valuation of $700m on AUM of around $1.7bn charged at 0.25%, giving it revenue of $4.25m and a multiple of 165x.
By March this year Wealthfront had closer to $3bn in AUM and yet, even if it gets to $30bn, that is still a 9x multiple. Even reaching $30bn would be good going when you consider there are currently more than 200 robo-advice services online or coming online, with a number of big players yet to show their hand.
Loyalty is a big issue. If, for example, the other US robo-advice giant, Betterment, outperforms Wealthfront in 2016, will many of Wealthfront's clients not simply do what the majority of unadvised clients do - chase performance and flip their account to Betterment?
If you build it, are you sure they will come?
Acquisition cost-per-client for a pure tech solution seems to dominate the spend and, in an increasingly competitive arena, it is not entirely clear that ‘if you build it they will come'.
The speed of AUM growth within the emerging robo-advice services of some of big traditional players - Schwab and Vanguard to name two - has been met with much fanfare in the US. On closer inspection, however, asset flows seem to come from their other direct-to-consumer (D2C) or unadvised channels.
So what does all this mean for financial advisers? Many are not sure what to do. Currently they hold a very strong position and, in the near future, the data indicates this is likely to continue. Datamonitor Financial's Global Wealth Markets Analytics report (April 2015), for example, predicts global liquid assets at the end of 2018 will be $114 trillion, while a report from McKinsey in June last year estimated the total addressable market for ‘virtual advice' at $13.5 trillion, giving it a share of 12%. If these figures are correct it looks like almost 90% of the worldwide market will still be advised in 2018.
Also, robots cannot deliver the personal ‘comfort factor' offered by real live financial advisers - that arm around the shoulder that says "I am an expert and I have carefully analysed your situation and this is what I think you should do". At the same time, robots have scale and efficiency and, as the Americans say, they want to ‘drink the Kool-Aid' too.
Yet, while the question that seems to dominate is which is better a) the human or b) a robot, the real answer could actually be c) a human combined with a robot. Take air travel as an example - we all know that many planes are flown using auto-pilot but how many of us would be comfortable getting on a plane that relied totally on the robot and did not have an experienced pilot on board? If - or when - ‘computer says no', I want an expert on board who can take action to avert a catastrophe.
Man vs Machine
Another, rather less dramatic, example is chess. The former world champion grandmaster Garry Kasparov played in the most noteworthy ‘Man vs. Machine' events. In 1996 he defeated IBM's computer Deep Blue but the following year he lost the rematch. The first game of the 1996 match remained famous though, as it was the first game in the history of chess in which a world champion had been defeated by a computer.
Kasparov later had the idea to invent a new form of chess in which humans and computers co-operate, instead of contending with each other. He called it ‘Centaur Chess' as, like the half-man, half-horse of Greek mythology, he felt a combination of human and technical strengths offered the best of both worlds. Adapting that approach to financial services, then perhaps rather than robo-advice the solution we should be focusing on is ‘Centaur Advice' or ‘Centaur Investing'.
This ‘Centaur' concept of well-designed, purpose-built technology combined with a skilled adviser must surely be the way forward. Without a doubt, technology has the potential to streamline the financial world and make it more efficient, cost-effective and, ultimately, more profitable but it is not the answer on its own.
Until you and I are happy to fly on a jumbo jet that is flown without an experienced and qualified pilot in the cockpit, there will always be a place for real people and, by extension, for the kind of ‘Centaur' technology that helps put the human experts in control of their businesses.
Mike Roberts is UK managing director and head of innovation at PortfolioMetrix
