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Robo-investing 2.0: Why some succeed and others fail
Summary: Established institutions are starting to enter the robo-advice arena, but while these approaches can streamline the provision of investment guidance, strictly algorithm-based products can fall short of serving sophisticated investors' needs. That's why Saxo uses a hybrid approach.
The robo-advice market was initially dominated by start-ups, but over the past 12 months it has seen the entry of established institutions such as Standard Life, HSBC, Fidelity and Goldman Sachs, all of whom have either launched their own robo-advice service or invested in one. Robo-advice typically involves digitising client engagement and the use of algorithms to identify suitable portfolios for investors. It was originally designed to offer investors, who might not otherwise have been able to afford financial advice, investment guidance at a lower cost to that offered by banks, independent financial advisors or retail fund platforms.
As such, robo-advice is typically seen as a streamlined approach more suited to people starting out in their investment journey towards fulfilling specific goals.
Many endorse the rise in robo-advice, believing that the future of investment management is data-led and not necessarily relationship-led. It is clear the growth of the sector has a receptive audience and the use of technology in this way was initially advocated by the regulators such as the UK’s Financial Conduct Authority, the US’ Securities and Exchange Commission and the Monetary Authority of Singapore as a way to serve clients with fewer investable assets and help close the so-called advice gap. The sector, however, came under fire in May 2018 when the FCA said that it was disappointed with robo-advisors, warning that app-based investment companies were failing to properly inform clients about the risks, weren’t clear on the fees and were failing to fully understand what their customers really wanted to achieve. Therein lie the key issues for robo-advisors: client education, regulatory complexity and client acquisition.
There is certainly a place for straightforward robo-advice in today’s complex and fragmented investment marketplace, but difficulties have emerged when targeting such a mass market. There are three lessons learned by those seeking to build such an offering. First, education is key and the hardest part when operating within financial services. A mass market of potentially inexperienced clients will not have the level of knowledge or understanding of investing compared to a typically more sophisticated investor audience. Second, for robo-advice companies whose background is often tech or marketing, financial services regulation is broad, complex and with less sophisticated clients, often rather tricky.
Large banks and wealth managers have the added complexity of having to build new online platforms despite often starting out with systems that are outdated and clunky. This creates more potential security and regulatory challenges. Finally, building a strong client base is exceptionally difficult for startup robo-advice companies that do not have the benefit of distributing to large, extant client books. It is for this reason that some large banks and wealth managers are looking for suitors in this market rather than building their own services from scratch.
Nutmeg, in which Goldman Sachs invested last year, claims to have seen a growing trend of people with £1 million-plus in assets using its service. The use of algorithms or robots is not at the stage where it could deal with more complex individual investment needs, particularly for a more sophisticated investor audience. The future of investing is digital, but for more sophisticated and professional investors, there is a place for human intelligence which can determine the type of service required for each individual client. There will always be a need to understand the emotional drivers of wealth creation, which may not be fully accommodated by robo-advice. For all the advantages of technology, a hybrid model which includes more bespoke solution constructed by humans and machines is better-suited to meet the evolving needs of this client segment.
Saxo Bank offers a digital service that is within the robo-advisory sphere but is not based on algorithms or robots. Instead, it uses the expertise of internationally renowned investment companies while targeting a specific audience of private and professional investors. Furthermore, while client engagement is focused around the online platform, a human (non-advisory) relationship is available to varying degrees, via telephone or face-to-face.
SaxoSelect, which attained over 75% AUM growth across all of its portfolios in 2018, is a digital service that enables clients of Saxo Bank to use world-leading insight to invest in up to nine different managed portfolios, split into three categories of pre-selected investments. These are managed Equity Portfolios of global stocks, which utilise the strategies and research from world leading experts at Morningstar and Nasdaq, targeting strong growth over the medium term. The second set consists of Trading Strategies portfolios, which are managed by experienced traders, carry higher risk and focus on alternative trading styles. SaxoSelect also offers diversified Balanced Portfolios which utilise Blackrock’s iShares and are based on low cost ETFs for long-term investments and savings.
SaxoSelect is a much cheaper offering than traditional wealth managers and doesn’t have the high cost of onboarding new clients, given Saxo Bank’s broad and existing global client base. The service is providing investors with access to innovative investment opportunities, attracted to consistent, strong performance with a balanced risk appetite. SaxoSelect is also built to be white labelled, meaning other banks, advisers and investment managers can utilise both the technology and the managed portfolios for their own clients.
Saxo believes that partnerships could become one of the most disruptive factors in the financial sector in the coming years and become the foundation for a significant step forward in the sector’s use of technology. Furthermore, the firm has already partnered with banks and wealth managers such as Standard Bank, Banca Generali and Moneyfarm to white label multi-asset trading and investment infrastructure to service their customers’ access. Saxo believes that a growing number of financial services companies no longer have to develop their own systems and can use the expertise of like-minded firms to unleash significant resources and deliver better services and products for clients.
As such, robo-advice is typically seen as a streamlined approach more suited to people starting out in their investment journey towards fulfilling specific goals.
Many endorse the rise in robo-advice, believing that the future of investment management is data-led and not necessarily relationship-led. It is clear the growth of the sector has a receptive audience and the use of technology in this way was initially advocated by the regulators such as the UK’s Financial Conduct Authority, the US’ Securities and Exchange Commission and the Monetary Authority of Singapore as a way to serve clients with fewer investable assets and help close the so-called advice gap. The sector, however, came under fire in May 2018 when the FCA said that it was disappointed with robo-advisors, warning that app-based investment companies were failing to properly inform clients about the risks, weren’t clear on the fees and were failing to fully understand what their customers really wanted to achieve. Therein lie the key issues for robo-advisors: client education, regulatory complexity and client acquisition.
There is certainly a place for straightforward robo-advice in today’s complex and fragmented investment marketplace, but difficulties have emerged when targeting such a mass market. There are three lessons learned by those seeking to build such an offering. First, education is key and the hardest part when operating within financial services. A mass market of potentially inexperienced clients will not have the level of knowledge or understanding of investing compared to a typically more sophisticated investor audience. Second, for robo-advice companies whose background is often tech or marketing, financial services regulation is broad, complex and with less sophisticated clients, often rather tricky.
Large banks and wealth managers have the added complexity of having to build new online platforms despite often starting out with systems that are outdated and clunky. This creates more potential security and regulatory challenges. Finally, building a strong client base is exceptionally difficult for startup robo-advice companies that do not have the benefit of distributing to large, extant client books. It is for this reason that some large banks and wealth managers are looking for suitors in this market rather than building their own services from scratch.
Nutmeg, in which Goldman Sachs invested last year, claims to have seen a growing trend of people with £1 million-plus in assets using its service. The use of algorithms or robots is not at the stage where it could deal with more complex individual investment needs, particularly for a more sophisticated investor audience. The future of investing is digital, but for more sophisticated and professional investors, there is a place for human intelligence which can determine the type of service required for each individual client. There will always be a need to understand the emotional drivers of wealth creation, which may not be fully accommodated by robo-advice. For all the advantages of technology, a hybrid model which includes more bespoke solution constructed by humans and machines is better-suited to meet the evolving needs of this client segment.
Saxo Bank offers a digital service that is within the robo-advisory sphere but is not based on algorithms or robots. Instead, it uses the expertise of internationally renowned investment companies while targeting a specific audience of private and professional investors. Furthermore, while client engagement is focused around the online platform, a human (non-advisory) relationship is available to varying degrees, via telephone or face-to-face.
SaxoSelect, which attained over 75% AUM growth across all of its portfolios in 2018, is a digital service that enables clients of Saxo Bank to use world-leading insight to invest in up to nine different managed portfolios, split into three categories of pre-selected investments. These are managed Equity Portfolios of global stocks, which utilise the strategies and research from world leading experts at Morningstar and Nasdaq, targeting strong growth over the medium term. The second set consists of Trading Strategies portfolios, which are managed by experienced traders, carry higher risk and focus on alternative trading styles. SaxoSelect also offers diversified Balanced Portfolios which utilise Blackrock’s iShares and are based on low cost ETFs for long-term investments and savings.
SaxoSelect is a much cheaper offering than traditional wealth managers and doesn’t have the high cost of onboarding new clients, given Saxo Bank’s broad and existing global client base. The service is providing investors with access to innovative investment opportunities, attracted to consistent, strong performance with a balanced risk appetite. SaxoSelect is also built to be white labelled, meaning other banks, advisers and investment managers can utilise both the technology and the managed portfolios for their own clients.
Saxo believes that partnerships could become one of the most disruptive factors in the financial sector in the coming years and become the foundation for a significant step forward in the sector’s use of technology. Furthermore, the firm has already partnered with banks and wealth managers such as Standard Bank, Banca Generali and Moneyfarm to white label multi-asset trading and investment infrastructure to service their customers’ access. Saxo believes that a growing number of financial services companies no longer have to develop their own systems and can use the expertise of like-minded firms to unleash significant resources and deliver better services and products for clients.