Where next for robo-advice?

Robo-advice is not where the party is at in 2018.

The FinTech darlings of five years ago have lost a little steam. Back when the first generation of robo-advisers were making waves with ground-breaking products underpinned by new technology, robo-advice was flying up the hype cycle.

Less than two years ago UK Chancellor Phillip Hammond was championing Nutmeg’s post-Brexit £30m funding round, describing the news as confirmation of the UK as the world’s “global FinTech capital”.

But the sector has struggled to prove its economics. A Deloitte report last year estimated that robo-advisers would need around £6bn assets under management to generate enough revenues to cover their costs. Even the biggest UK robo-advisers are some way off this target.

The problem is that the product proposition for robo-advisers is usually some variation on simple and cheap investing. That means low fees charged as a proportion of customer assets and a scale game to break even.

At the same time, it’s expensive to acquire new customers, especially if you’re having to persuade them to trust a completely new brand for managing money.

So, what’s the future for robo-advice? We’ve outlined three key elements for the next phase of this once-hyped FinTech vertical.

Product development
The product needs to get both smarter and more economical.

A lot of attention has been given to so-called “robo-advice 2.0”, but what it means in practice remains unclear. There is an idea that the application of machine learning could help provide customers with more sophisticated advice and investment opportunities.

But it’s unclear if investors want more sophisticated online advice, and in fact it sometimes seems like the opposite is true. Investors want simple and quick answers to simple questions. This is the logic behind the concept of “micro-journeys” in financial advice. Micro-journeys are simple decisions retail customers often need help with that lend themselves better to a website than do more involved investment decisions. Examples include the choice between saving into an ISA or a pension, the choice between investing and saving, or the choice between paying down debt or funding existing savings.

By offering these simple points of advice, a robo-adviser can broaden its relationship with the customer and potentially open-up new revenue streams.

Another, perhaps easier, product development that could improve the fortunes of robo-advisers, would be to move away from an ad velorum fee structure (one in which fees are proportionate to assets deployed). By instead charging a fixed ‘entry’ fee, robo-advisers could move towards pay-as-you-go advice away from asset gathering and this might have more promising unit economics because it would hinge less upon scale.

Multi-product
Supporting micro-journeys could allow robo-advisers to become multi-product. The initial idea behind robo-advice was to help more people invest their savings more easily, but advice can incorporate so much more than investment products, as any IFA knows.

By opening multiple revenue opportunities from each customer they win, robo-advisers can help mitigate high costs of customer acquisition.

Robo-advisers should be thinking hard about how else they can support their customer base with their financial lives. We’re already seeing this happen elsewhere, with digital mortgage brokers mulling protection products. It’s taking robo-advisers longer to adopt horizontal product expansion, but it could be a big part of the industry’s future.

Incumbents
Of course, the best way to lower the cost of customer acquisition is not having to win any new customers in the first place. Those businesses that have extensive face-to-face operations with large customer bases might be the more likely leaders of the future of robo-advice.

Take the banks. They built up large face-to-face advice business lines a decade ago and have started rebuilding some of this in recent years. They have huge customer bases, customer data that could yield insight into needs, contact with customers and – still – trusted brands.

Of course, encouraging existing customers to move part of their financial affairs from high-margin face-to-face advice to lower-margin robo-advice can in the short-term feel like cannibalising your own revenues; but of course, competitors lie in wait, and it’s usually better to cannibalise your own book than have someone else come along and eat it.

Banks have realised this and are starting to act. The next phase of robo-advice should see banks and other incumbents playing a much more active role.

The next few-years will see significant change in this industry. New players could find the patience of their VC backers being stretched thin, leading to sector consolidation. Incumbents could find themselves taking centre-stage with a more aggressive play to existing customers. And the person on the street could find more and more services desperate to help them navigate their financial lives.