It’s not quite the scenario envisaged in Terminator or 2001: A Space Odyssey, but there’s no doubt that robots and automated services are playing an increasing role in our everyday lives.
Finance and investing are no different, with so-called ‘robo advisers’ taking a bigger slice of the investing cake from traditional financial advisers. It’s the same story both here in the UK and in the USA – where research has estimated that assets under ‘robo-management’ by are set to increase by 68% per annum by 2020 to over $2.2 trillion.
It’s not hard to see why the machines are on the march. The ‘star’ fund managers – those whose ability to beat the market is reckoned to be so great that the higher fees they charge are supposedly recouped many times over in better returns – are being beaten by tracker funds like Vanguard’s FTSE UK Equity Income Index Fund. There’s even speculation that Warren Buffett’s legendary stock picking expertise could be replicated by a robot.
Wealth managers are advised to look to their laurels, with more than 40% of High Net Worth Individuals (HNWIs) indicating that they’d be happy to see part of their portfolio invested by an automated system. The difference in the percentage of younger to older investors happy to take such a route is, predictably, stark – with almost 70% of younger clients in favour compared with just over a quarter of over-45s.
There is no reason why the more simple investments should not be set up and managed online: clients are used to managing their bank accounts, holiday bookings and many other aspects of their lives online, and straightforward investments like ISAs and pensions can be self-managed perfectly well without professional intervention.
Historically, one of the best reasons for taking independent financial advice is the need to remove human emotional frailty from the process to achieve a long-term, dispassionate view of investment performance. Emotions are certainly a big problem – and what’s less emotional than computer software?
Where good wealth managers score over computers is when it comes to lifetime financial planning – which is more than merely structuring an investment portfolio.
As investors grow older, have families, businesses and other concerns, the need to plan their finances based on their own circumstances, not those generated by an algorithm, becomes even more important, especially when children and elderly dependants are included.
As retirement approaches, the ability to define which assets should be cashed in, which re-invested and which left well alone, and the varying tax implications, may not be as straightforward as it seemed at age 35, when the investor’s personal circumstances were so much simpler.
Effective financial planning from a professional wealth manager means that the structure of an individual’s portfolio can be considered taking into account family dynamics and individual preferences, with protection for the people held most dear built into the plan from the very start. A robo-adviser is unlikely to be interested in the fact that you have no faith in your son-in-law, for example; but it’s something that a trusted adviser will take into account and plan accordingly.
Thankfully for us, clients still value the personal relationship they have with their financial adviser – but it’s not something to be taken for granted.
Most clients will want to talk to a trusted adviser when it comes to planning for the future and making important financial decisions. It’s up to firms and advisers to ensure that the relationship with their clients is nurtured, so that trust continues to grow.
Forward thinking wealth management firms will ensure that they communicate effectively and often with their clients, not just about their investments but also about potential opportunities, products and events they could be interested in – as well as ensuring they have access to information, expertise and opinions to help them understand their finances better and make the most of their money.
So – the end of the wealth manager? Unlikely. But the sophistication of the robo-advisers, already scarily advanced, is only going to increase in the future, along with the ability to plan and take individual investors’ circumstances into account.
The rise of the robots is a warning to financial advisers to ensure that the services their clients are playing for really do add value to their investments.