The term ‘robo-adviser’ is being used increasingly to describe online-only investment services. Some sites provide general information about investments, others provide interactive planning tools, and others offer investment portfolios. The largest offer it all. So if Roboadvisers are going to bring disruption to the UK, as sure as Robocop brought order to Delta City, there are two key questions that advisers have to ask.
Firstly – is this a trend that can help or hurt me?
As with any disruption to a traditional model, the key is flexibility.
Flexibility in understanding how the emergence of online investment services affects and attracts different types of existing and new customers: younger investors (tomorrow’s clients) expect core investment services to be online, interactive and ubiquitous. This is not incompatible with face to face meetings on more strategic matters.
Flexibility in thinking how to interlace traditional services with online services to suit client needs. It’s not a case of offering one thing or another. It’s a case of servicing different needs in different ways, so that the adviser achieves one core aim: to retain the customer’s positive view. Retaining the customer’s positive view helps maintain a healthy customer relationship.
Played well, the integration of online-only investment services (be they discretionary, advisory or execution only – there are examples of all 3 in the UK market) into your business model should help complement your core proposition of looking after customers. Your priority, though, is to start looking after tomorrow’s customers, today.
The second question that should be answered is – what does this mean for my existing business?
In our view, the growth in online investment services means that advisers need to evaluate whether and how they deliver ‘value add’, and what the characteristics of that value add are.
We believe there is a fundamental difference between “Economic Value Add” and “Emotional Value Add”
Economic Value Add is the traditional measure – it considers providing superior risk-adjusted performance relative to a given objective. It can be evaluated through a quantitative process – in pounds, in basis points, in Sharpe ratios. However, multi-asset portfolio construction is becoming increasingly streamlined: hence the rapid growth since RDR of ‘Asset Allocation Funds’ that provide a strategy within a single fund. Asset Allocation Funds can be categorised in broad terms by their objectives such as Relative Volatility, Target Volatility, Target Return or Target Date. The adviser’s Economic Value Add is therefore not to provide an asset allocation strategy (that is done within the fund), but to ensure the strategy matches customer’s desired – or required – outcomes. How to get under the bonnet of these funds is a different topic..
What we define as Emotional Value Add is more abstract. It engages with a different type of thinking around customer needs and interacts with different areas of cognitive reasoning that underpin customer decisions. Emotional Value Add is shown when advisers have the emotional intelligence to provide reassurance, trust, empathy, and understanding. Advisers who are valued most by their customers, and who typically have the most successful practices, are those who understand that while a business cannot be built on Emotional Value Add alone, without it any Economic Value Add goes un-noticed, unappreciated and unvalued.
So a Roboadvice proposition should be welcomed as a valuable tool for advisers to have in their toolkit. In 10 years’ time, not to have it would seem as unthinkable as not having a mobile phone.
While it is important for advisers to understand that business can be built on numbers, it is relationships – and the emotions that drive them – that are the real cornerstone for success.