Unconvincing Robo Advisers’ Real World Track Record – The Robotic 800 Pound Gorilla In The Room

There are plenty of obvious upsides that a well executed robo advice service can deliver. The elevator pitch is that robo advice can provide professional diversified wealth management expertise to a massive group who are either currently financially unable to afford existing options or who are not impressed enough with more traditional advice to justify making the leap from a DIY approach.

Robo advice can provider lower and more transparent fees, increased simplicity and a proposition in tune with the ever increasing appetite of tech savvy Millennials, Generation X/Y/Z and even Baby Boomer ‘silver surfers’ for the provision of slick efficient technology solutions to meet their needs.

HOWEVER Robo advice is not a wealth management silver bullet. The 800 pound gorilla in the room is a lack of confidence in typically relatively unproven underlying portfolios with limited real world track record. Investors need to feel entirely comfortable with the actual performance over an extended period of time of the specific portfolios their money will end up in including how the thing will stand up to acute and chronic market stress. However many of the robo firms cannot provide this peace of mind because their firm is relatively new.


Cyborg Gorilla

Robo advice firms typically try to address this shortcoming by espousing the CVs of the discretionary teams behind the portfolios or the eggheads who have built the algorithms that power the asset allocation of the more automated robo advice firms.

A significant degree of caution is advisable here. The list of asset managers that have claimed to have previously constructed portfolios that were ‘the next best thing since sliced bread’ as a marketing hook for a new set of portfolios which have then not delivered is long and distinguished.

The obvious remedy for this particular issue is to be wary of “simulated” or “historically projected” performance that show appetizing returns that ‘would’ have been achieved if the money managers had been running the portfolios the robo proposition offers.

There is no substitute for investing into the very portfolios that have an extended real world track record. There are robo asset managers that have managed to eke out impressive annual returns in the actual portfolios that the robo feeds directly into over a period that includes the 2008 crisis. Seek these firms out.

It’s worth noting that in the scenario where an existing financial adviser is white labelling the services of a robo partner provider, then the investor must be able to look through and interrogate the real world credentials of the firm that will actually be making the investment decisions.

Why Should IFAs Embrace Rather than Fear the Rise of Robo-Advice?

Many advisers see robo-advice as a disruptive and potentially disintermediating threat. But robo-advice can instead enhance an IFA’s business model and improve client outcomes.

The answer is founded on the fact that robo-advice is a reality that is only going to get bigger and stronger which means that trying to turn back the tide King Canute style is not going to work. Far better to take advantage of this development as a revenue generating opportunity that can also improve client service.

For IFAs, the blending into their existing service mix a complimentary robo-advice type service can provide some very attractive benefits. It provides a viable solution, blessed by the regulators, for the ‘advice gap’ and so called ‘orphans’ who are not commercially viable as IFA clients in the traditional model.

Additionally a Robo-advice offering can offer a scalable entry point for clients many of whom will need face-to-face advice in the future on tax planning, pensions, mortgages etc thus allowing an IFA to compete with the banks in this space on a level playing-field.

The simplest and most cost effective route for an IFA to add a robo-advice string to their bow is to partner with a provider that can deliver a white-labelled full robo package that includes the technology and the underlying investment management prowess and track record. More on that in a future blog!

It’s worth pointing out that robo-advice is not necessarily just for those with a smaller nest egg. Many wealthy investors are keen to minimize the amount of fees that an investment portfolio costs per year as part of their approach to maximise overall returns achieved over time. These type of investors would typically be laser focused on maximizing the positive impact of the magic of compounding which they see as diluted by every pound that is extracted. An IFA offering a robo-advice proposition is able to provide a genuine solution for those looking for the most cost effective way to have their investments managed in a diversified portfolio by expert money managers.

Now is the time to embrace the emergence of robo-advice which gives the IFA a revenue generating USP to deliver to a wider target market a proven track record in delivering medium to long term top quality asset allocation with the aim of growing clients’ wealth over time.