Looking to the past the pioneering Wealthfront, was believed to be the first robo-advisor and was established in 2008. So this year brings to a close a decade of Robo-Advice.
But what do we see as important going forward. Speaking to my colleagues at RiskSave and others in the digital wealth community we see four next steps as the digital advice model becomes more sophisticated and moves beyond the Robo of the first ten years model. This model consisted of creating a portfolio after a short questionnaire from a restricted range of funds. What can we expect in the next decade?
- Gamification: considered more effective for the mass-market. Gamification is likely to create greater customer engagement. An engaged customer has a higher retention rate, can act as a brand ambassador and is likely to give data more accurately and frequently leading to improved results.
- Greater use of Artificial Intelligence: Implementing AI frameworks will be a vital way of cutting costs however we see the leading products as more likely to emerge from the technology sector rather than financial services. With chatbots the hot new thing, it’s likely that a large technology player with an almost unlimited research budget will create the most advanced and engaging interface. AI is likely to be a measure of keeping costs down rather than product differentiation in our view.
- Greater Product Range of Financial Instruments: Currently, following early market leaders Wealthfront and Betterment in the States, the clear majority of Robo-Advisors create portfolios from a range of ETFs. It seems clear than an investment universe of individual securities is potentially more appropriate. This wider universe can reduce risk for a given level of expected return. It also saves a layer of fees (those payable to the ETF provider). In more academic language, a wider universe is of equal, or greater, efficiency. Portfolios containing low-cost funds, individual securities and a range of illiquid assets are likely next steps as the industry matures.
- Greater use of LDI frameworks: Liability-Driven Investment (LDI) frameworks are the gold standard in the pensions Industry. It is likely that this methodology which explicitly models both sides of the balance sheet will filter down to the retail market, both through the emergence of LDI-style passive (and active) multi-asset class funds, and through digital asset managers embracing the technology. It is notable that all of the largest players in traditional asset management offer an LDI product suite, but that this technology has yet to be embraced by the robo-advice sector. Although RiskSave in the UK and TrueLink in the states offer product suites with LDI characteristics.