The expected global recession brought on by the Covid-19 pandemic will prove a stern test for robo-advisers that have attained a healthy degree of popularity in recent years.
Beginner investors using robo-advice platforms are likely have faced a sudden and severe downturn in their portfolios after several years of consistent, if shallow, growth.
“World equity markets had a strong year in 2019 and investors who either started their investment journey or held their nerve to ride out the volatility of markets at the end of 2018, benefited from this performance,” says Neil Alexander, Nutmeg’s new CEO.
The late-2018 volatility may begin to look like a picnic compared to what has already been witnessed in 2020 and is still likely to come.
This was most recently brought home on March 20th when the Dow fell more than 500 points as the price of US crude slid to a record -$40.32 a barrel with lack of demand making it more costly to store oil than sell it.
Such volatility may prove too hard to stomach for many beginners to investing who hold portfolios with robo-advice platforms like Nutmeg.
Target audience
Financial inclusion is supposed to be one of robo-advisers' chief selling points, providing a low-cost, easy-to-access platform that anybody can use to gain exposure to bonds, stocks and funds. Investing is meant to be no longer just the realm of the rich and the financial expert: younger people and those with minimal capital and experience can join the fun as well.
Thus far, however, this does not appear to be the case. A recent research paper by Deutsche Bank found that the typical client of a digital wealth manager in Germany is aged between 45 and 54, is 80% likely to be male, and earns a salary three times the median income.
Senior Deutsche economist, Orçun Kaya, told Finextra Research that this conclusion was “surprising and paradoxical,” and suggests robo-advice platforms need to become more polished and well-rounded offerings to broaden their appeal.
They also may be struggling to identify their core demographic. While the digitally-centric offering would hold more appeal to beginners, seasoned investors (with more capital to put up and therefore more appealing from a profitability perspective) may be put off and seek a more traditional service.
“Many investors are accustomed to either managing their own portfolios or meeting face-to-face with a financial professional who does it on their behalf,” Keith Denerstein, director of investment products and guidance at TD Ameritrade says.
“There’s an initial sense of trepidation when that advisory relationship moves to a digital environment.”
Denerstein does however see an increasing number of people willing to embrace new technologies, particularly as robo-advice platforms establish track records of positive customer response.
Furthermore, supplementing digital wealth platforms with machine learning tools would enable TD Ameritrade, Nutmeg and others to cater digital experiences to the preferences of their clients.
“Of course, humans will continue to play a role for those seeking a human/digital hybrid experience,” Denerstein sums up.
Filling the gap
Entering a sustained period of downward traffic across global markets, users of robo-advisers could be looking for a greater human-led service to help steer them through the choppy waters.
This is where high-street banks and other incumbent financial institutions may seize the opportunity to plug this advice gap.
A recent report by Deloitte highlights the decline in both new investment platforms coming to market and in the funding they are attracting. This points to incumbents entering the market either through acquisition of robo-advice platforms or launching their own, as TD has done. Lloyds Bank and Goldman Sachs both plan to do the same later this year.
However, this has proved a tricky move to make. Investec closed its Click and Invest service in May 2019 citing a lack of appetite from consumers. In August 2019, UBS discontinued its own automated online investment service, believing its potential to lure young investors was limited. Both closures came only two years after their respective launches.
The problems then lie deeper for the likes of UBS, Investec and potentially Lloyds and Goldman Sachs. They have to contend with legacy business models, as well as legacy systems.
Therefore, the trend of traditional financial institutions buying up smaller challenges or partnering with technology giants will probably continue.
See the Finextra long read on robo-advisers, beginner investors, Covid-19 and more at Global downturn will be a test for the robo-advice model.