Six, seven years ago, a couple of fledgling “robo” firms with direct-to-client business models were getting a lot of airtime and attracting eye-watering sums of private equity cash. We, as a firm with a big investment in technology, coupled with investment bona fides, were ideally placed to enter that market. We didn’t, for good reason.
Quite simply, I had – and still have – little conviction in a business model that disintermediates good advisers. I found the then self-congratulatory arguments propounded by private equity investors (who so readily wrote the cheques) naive. My view is that they stood to “lose their shorts” and would then throw good money after bad. Why my scepticism? Well, it relates only in part to a poor economic model:
- The robo “advice” models we investigated were simplistic, linear, unable to capture nuance and, frankly, were too easy to replicate. I saw no intellectual property (even now) that could really be described as a barrier to entry
- I felt that these firms grossly underestimated the marketing costs of acquiring clients and that they would burn through their cash before they became self-sustaining
- In my estimation, these offerings would primarily attract new money and would have little impact on converting the existing “stock” of wealth
- Investment management is about trust and credentials. A basic range of multi-asset, passive portfolios was always going to have narrow appeal. If any of these start-ups became a threat, mainstream asset managers would enter that market and casually divert a small portion of their very large marketing budgets.
This all smacked of bleeding-edge rather than leading-edge. I read that one firm is now managing several billion dollars of assets, which was hailed as a success. However, when I reverse engineered the IRR’s required by successive bouts of private equity funding, the number would need to be ten times that. Economics aside, my other reservations were even greater.
My main problem is that robo as a substitute for humans is flawed and it misses the point, which goes to the heart of advice. It reflects a simplistic appreciation of what good advisers actually do and what investors really buy. Sure, top advisers are knowledgeable and have a good grasp of investments, tax, estate planning etc., but that is simply a pre-requisite to play and is peripheral to real value-add. Clients buy advisers because they can engage with them. People empathise with people – that’s why great advisers have high EQ, are intuitive and are better able to engender trust. Advisers are also husbands and wives, are parents and have lost parents. They are not immune to fear and anxiety; they also harbour hope and aspirations. Trust sits at the very epicentre of advice and investors want to deal with people they can relate to.
The sceptics may ask, that’s all very well, but where is the actual value in all this mushy human stuff, particularly given the impact of fees over time? Well, there are a couple of very hard, rational financial reasons why clients should be willing to pay advice fees. In my 25 years in investments, I am absolutely convinced that investor composure and behaviour is the most critical ingredient to long-term success. I have seen how little it takes for composure to collapse and how readily investors are prepared to capitulate on their strategies. This can be driven by fear, but also by an instinct to take matters “firmly in hand” – doing nothing is an anathema to many. Also, it is human instinct to oversimplify things and assume that the required action is more obvious than it really is. Sitting on one’s hands doesn’t come naturally, particularly when being decisive is how you amassed your wealth.
I have had the opportunity of engaging with several private investors recently who were adamant they wanted to change tack and de-risk. They weren’t uneducated or stupid – on the contrary. They were literate, numerate professionals that were engaged with their investments and financial markets. They too required the coaching and re-assurance to stay the course. By exiting markets after sustaining losses and only finding the confidence to reinvest after they have rebounded rubbishes all projections – these are REAL losses that need to be quantified before one waxes lyrical about fee drag. Advisers can recoup a decade’s worth of fees in a single intervention.
Humans have another critical advantage over machines. It’s the way we think. We are really bad at doing maths to 12 decimal points, but we do things intuitively that are very hard for machines. We solve sophisticated problems without even thinking. Take hitting a golf ball or riding a mountain bike down a track at speed. When it comes to advice though, it’s about having the human skills to extract subtle information from a client and then only define the problem. After trading off non-obvious competing costs and benefits, incorporating preferences and aspirations, the adviser now needs to communicate the advice to clients in a way that they buy into it. Every client is different and the delivery needs to be adapted – it requires instinct, judgement and experience.
Do I think robo is a complete non-starter? Definitely not. Regulatory pressures are making advice very expensive to dispense. More investors fall into the sub-economic bucket and robo is definitely better than no advice. Secondly, robo is a better option than bad advice. Finally, it is the combination of human beings and technology that is most potent – robo for adviser has legs. However, robo firms that have touted disintermediation are going to find it difficult to now woo advisers.
Technology and artificial intelligence is going to change the world and we haven’t even begun to quantify the social impact of job losses and redundancy. However, I feel that good advisers have almost the least to fear. The acid test for every adviser should be, “if I divvy up what I do, which bits could a machine do better?” Then focus on the other bits.
