Blog: Can asset managers really make robo-advice work for them?
Robo-advice is top of the agenda for nearly every financial services business at the moment.
Platforms, asset managers and even the banks are looking closely at the idea, with new entrants emerging, and existing incumbents announcing grand plans to put customers at the heart of their businesses by implementing this seemingly newfangled invention.
For asset managers the reasons to be interested in the space are obvious. Robo-advice could at some stage become the foremost means of distribution, especially if the banks and the platform giants can make it work for their legions of loyal customers.
However, despite all the hype and headlines, it remains very much open to debate whether robo-advice is a threat or a benefit for asset managers.
While it could well become a very popular option for many savers, the key attraction for the consumer is the price, and the price is only low because passives are at the heart of the solutions.
The delivery of advice in this new way does not change the real challenge for fund groups – namely, how can they compete with the rise in popularity of lower-cost investment solutions?
Anthony Morrow, founder and chief executive of eVestor, the new online investment advice business, says while asset managers will get involved in robo-advice, it will be very tough for them to integrate active funds into such solutions.
“The real complication for many of the asset managers is this ongoing move towards low-cost solutions,” he says.
“We are seeing evidence of this constantly as flows into passive investments continue to climb. As a percentage of overall AUM, passive currently remains small, but that will only go one way, and no amount of investment by asset managers into robo-advice is going to change the fact that active funds cannot compete with passives on price.”
So how should asset managers position themselves? David Ferguson, founder and chief executive at Nucleus Financial, believes fund groups should essentially stick to their knitting and focus on delivering the alpha clients seek, rather than get involved in the low-cost robo-advice space.
Ferguson says rather than try to either buy distribution via exclusive deals with robo-advisers, or push for active funds to be included within robo-advice offerings (which would be no different to the fund of funds solutions available now, and no cheaper either) the only real goal for asset managers should be to provide solutions which sit alongside robo-advice.
“Buying distribution or shoehorning robo-flows into active funds simply won’t protect the sector and maintain the 75bp AMCs / 100bp OCFs to which it has become accustomed,” he says.
“The asset management opportunity is to work in parallel with beta providers and to promote the value they can add in relevant pockets of the market.”
Robo-advice will undoubtedly bring a number of opportunities for financial services companies, and with any luck it may actually help encourage those people scared to go it alone to start saving and investing for their retirement.
But passive solutions are likely to dominate the space as robo-advice businesses look to keep costs down to a minimum, and active managers need to consider whether they should – and actually could – stand in the way of this. Buying robo-advice businesses to sit alongside their existing products is an option, but even this approach risks cannibalising their active books.
Asset managers are adept enough to transform their businesses as new means of distribution emerge, but as with any such development, they must tread carefully when it comes to robo-advice.