The rise of the robots

The rising importance of financial technology and the growth of ‘robo-advice’ continues to have an increasingly significant impact on the wealth management value chain. We have entered the age of ‘big data’, which collates and removes traditional information advantages while creating new ones. Today’s investment industry must adapt to the challenges posed by the digital world. Ask yourself, what part of the value chain cannot now be digitalised?

A good example of the type of innovation taking place in the case of Nutmeg, one of the biggest new disrupters in the market since the launch of Hargreaves Lansdown’s Vantage platform. Led by Nick Hungerford, Nutmeg is one of the liveliest business-to-consumer and retail-centric offerings in the UK. Hungerford describes Nutmeg as “the UK’s first online discretionary investment
management company”.

Artifical intelligence
The proposition entices investors to “get an intelligent, fully managed portfolio”. Based on customer information, Nutmeg digitally builds and manages a portfolio by “diversifying your investments to avoid putting all your eggs in one basket”. Nutmeg monitors each portfolio, adjusting the asset allocation appropriately and rebalancing every month, at no extra cost. Nutmeg aims to do this at a low cost and according to each customer’s risk rating.

A different example is offered by South African-based fund-rating firebrand, Fundhouse, which has launched into the UK with a series of punchy fund reports, most notably a negative tier-3 rating of Standard Life’s supertanker Global Absolute Return Strategies fund. While anyone can register with the website to read the free content, premium content is only available to FCA-registered advisers and fund selectors.

Importantly, however, Fundhouse is prepared to rate a fund manager without a face-to-face meeting, which challenges the sanctity of the fund manager meeting. Fund analysts have long held an information advantage over advisers and investors through better face-to-face access to fund managers. Coupled with a more independent fee model, Fundhouse therefore tests a keystone of traditional fund ratings.

Given fund managers are increasingly digitalising content online, including fund manager videos, Fundhouse has timed the UK market perfectly. However, it raises the question of whether or not fund analysts still have an information advantage and casts doubt on the value of the interrogations of the fund selector.

A third example is PureGroup. Positioned as a business-to-business solution, it describes itself as “an independent company embracing technological and regulatory changes, and the impact this is having on the investment and savings industry”. 

PureGroup’s quant engine is forward-looking and innovative. Backed by US academics, it generates fund ratings that are linked to performance, correlation and macro assumptions at different points of the market cycle.

Overall, the proposition is well positioned for advisers seeking to modernise their supply chain, digitalise their own offering or reduce the cost of their fund research. PureGroup’s different approach may produce less overlap with established rating agencies, and the logical conclusion of its mission is direct-to-consumer via a simplified analytical service.

A question of trust
A prominent but as yet unresolved debate is whether standardised robotic solutions can replace more holistic advisers and wealth planning. Client trust can take many forms: it can be based on simplicity, transparency, accessibility and value for money; or built around softer factors such as diligence, holistic assessments, bespoke tailoring, reliability and the fiduciary bond.

Whatever factors traditional advisers cite, they will need to qualify them and provide evidence of the benefits more readily in future. Robo-advice will compete with more traditional services in the cloud, with cost, accessibility, transparency and functionality all key. Meanwhile, traditional offerings have been dogged in the past by mis-selling reviews, adapting to the Retail Distribution Review and the stigma left behind by the commission model.

If contemporary research is to be believed, advisers in aggregate do not have a good track record of investing assets or picking funds. Establishing a clear brand, skills, values and customer experience will be essential for the traditional adviser while building a clear digital presence with strong functionality both pre and post-advice. Digital platforms must also ensure form does not overtake the function of delivering suitable advice. This debate is set to run and run.

Learning to love the machine
While the development of digitalisation could be a real threat for traditional fund research, adopting technology now may prove the selector’s greatest ally. After all, the cloud promises fast, accessible information about fund managers, and a means to easily communicate views to investors and make timely asset allocation calls.

Take the Due Diligence Questionnaire (DDQ), for example. The DDQ, otherwise known as the Request for Proposal (RFP) or Request for Information document has long challenged the fund selector community and fund managers alike. The issue arises in the uniqueness of each individual questionnaire. Commonality and duplication are masked by different terminology, wording and bespoke criteria.

Increasing regulation in the fund space has ballooned DDQ requirements, and wealth managers find themselves increasingly under pressure from risk colleagues and the auditing department to demonstrate effective due diligence was performed. Despite this being the digital age, the DDQ process has not changed significantly in a decade, despite huge advancements in fund complexity and regulation.

As far as fund managers are concerned, consider that even investments such as exchange-traded funds (ETFs) represent a new digital open-ended, exchangetraded investment and continue to gain greater market share day by day. They are not a physical asset but are electronically traded, backed by either a basket of stocks, reference index or synthetic instruments.

ETFs are priced, valued, traded and viewed entirely in the cloud. Meanwhile, traditional collectives, with their slower settlement periods, are gradually reforming, which begs the question as to whether the purported ‘zero-sum game’ among active funds is due to outmoded methods of transmission. Meanwhile, RFP requests tend to generate a lot of secondary inefficiency within a fund management firm because of the way requests are channeled, for example, through sales.

The urgency created around the opportunity to tender often draws in many more people than simply the RFP team – fund managers, marketing, product development managers, compliance, risk team and so on.

Asset managers have responded by increasing the size of their RFP teams, with the growing operational cost being passed on to investors. This cycle is likely to become increasingly unpopular as the focus on costs and its resultant margin compression continues.

The burden on boutique firms is particularly onerous and we believe standardisation of some of the DDQ process will help alleviate resource pressures on smaller firms and benefit long-term competition with large asset managers. The creation of digitalised fund information in the cloud may ultimately help the fund manager and fund selector alike.

In-house impact
Also under the spotlight are the additional back-office expenses that arise from fund management. My expectation is that fee compression will inevitably have an impact all the way along the value chain, and services with fixed fees will face the risk of digital substitutes.

Fund managers that were previously content because there was plenty of margin to go around will now be left with no choice but to bring back-office functions in-house or seek lower-cost solutions. Asset managers increasingly run ever-larger fund books, leveraging internal back-offices to maintain flat operating costs, or outsource to large back-office suppliers and enjoy fee ladders with the rising assets under management (AUM).

Therefore, there is scope to do new fund deals with capped or even zero additional expenses. However, lower-scale boutiques will struggle to match these supertankers, as services such as transfer agency, brokerage, research, audit, fund accounting and custody tend to have fixed or floating pricing per AUM.

This may move more boutiques towards multi-boutique platforms such as BNY. When it comes to suppliers, boutiques tend to be price-takers but my hope is that they find innovative low-cost digital substitutes. New funds are disadvantaged at the outset due to proportionally high fixed costs that gradually reduce as assets grow.

This model incentivises the promotion and buying of larger funds, and it will need to change. External suppliers will therefore have to respond and redesign their service to be more flexible and ‘capital-lite’. That leaves marketing and distribution costs, and we have already seen how distributors and platforms such as Nutmeg are finding innovative ways to lower those costs.

Again, the solution is in the cloud, fee compression and digitalisation that will reach far back into the fund and platform supply chain.

Discretionary fund managers and fund selectors still have a window of opportunity to engage with digital platforms, to become more efficient and thereby refocus their economic value. Advisers can refocus their efforts around understanding the investor journey, tax and family planning. The value chain as a whole is realigning, and it will be digital in the future.