More than just a pretty website: the next step in the 'rise of the robos'

October 28, 2016

Henry Ford famously said 'if I had asked people what they wanted, they would have said faster horses'. In essence, people are really bad at thinking about things that don't already exist.

In the world of investment management, the same applies - despite the fact that the industry has undergone some major change in the past five years.

Much has been made about the 'rise of the robo', and for good reason. Five years ago a wave of forward-thinking companies saw the immense cost inefficiencies in the traditional wealth management industry and realised that, by using technology, that they could deliver the services that were previously only available to a select few to a wider client base at a fraction of the cost. All the while providing a level of transparency never seen before.

The pros and cons of robo advice

THE RISE OF THE ROBOS - PART TWO

However, if you look closely at what is currently available in the UK, you realise the model and the product of most robo advisers is the same as the traditional wealth management sector which has been around for centuries.

The 'revolution' is somewhat skin deep, with a new front end or 'wrapper' using technology to on-board clients and measure their risk profile before handing over to the supposedly trusty human behind the scenes to make investment decisions.

The first generation of robos, while a positive step forward, are essentially mutton dressed as lamb - nice interface, but nothing new.

But there is more fundamental change on the way. More advanced technology available at lower costs is giving rise to the robo adviser 2.0; where technology is used not just to change the packaging of the investment product but to change the product itself. There are two key strands to this transformation.

Firstly, cloud-based computing is unlocking huge computational capacity. Businesses across the world are harnessing the power of the cloud to optimise performance whilst ensuring risk is constantly maintained.

In the investment markets, this means that quantitative trading approaches, which rely on running hundreds and thousands of simulations in order to build the most accurate predictive models, are possible.

This power was previously only available to institutional investors who used the mainframes of the biggest banks but this is now a reality for retail investors via new digital platforms. Computer power cost has come down exponentially and made an immense difference to the accessibility for retail customers.

POWER TO THE PEOPLE

To bring this concept to life, take this example: if the typical worker in 1982 wanted to purchase something with computing power of an iPad2, it would have cost more than the 360 years' worth of wages. It is not hyperbole to say this new reality is quite literally bringing power to the people.

Secondly, and as a result of the explosion of the cloud, real personalisation is now possible. We used to live in a world of one size fits all but technology has enabled businesses to provide a truly personalised experience (think of selecting exactly the car you want).

This personalisation has only been available within financial services to investors with enough assets to afford a private wealth manager and those without that access have had to content themselves with 'model portfolios' or broad basket solutions.

Technology advances and that enhanced computing capability from the cloud, mean that the new wave of robo advisers can offer retail investors access to uniquely optimal portfolios specific to their circumstances where every trade is made only if it makes sense for them.

Even 'disruptive industries' mature and evolve - the notion that a new approach instantly 'solves' the problems and addresses the criticisms of an incumbent approach is rarely true. In reality, as we are seeing in wealth management, second wave disruptors emerge that take new technologies and new approaches further.

In the digital wealth management space, second wave entrants are bringing new enhanced features addressing not just the cost issue that existed in the traditional space but improving the product through greater and greater levels of individualisation.

The second wave will not be last and the changes will come quick - this is what is so exciting about what is happening right now in the sector.

Adam French is co-founder of Scalable Capital.

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