The shape of things to come: Could robo-advice transform pensions?

At a roundtable hosted by consultancy Barnett Waddingham, experts questioned whether a truly operational robo-advice service, which works not just in the savings phase but also at the point of and during retirement, exists anywhere in the world.

They cited several, related, concerns with the robo-advice model. The first is that robo-advice may not adequately address the needs of retirees in the complex new world of pension freedoms.

Behind every good robo-adviser are humans

Dan Egan, Betterment

“Robo-advice on accumulation is far more straightforward, but becomes way too complex at the point of retirement and in decumulation,” says Matthew Webb, head of international benefits at Thompson Reuters.

Jonathan Watts-Lay, director of financial education provider Wealth at Work, is also sceptical.

“It’s unrealistic to rely on one financial product for 25 years. Instead, you need a service notion,” he says. “The clear trend is that people want flexibility, with the support to help them.”

And in early July, contrarian asset manager SCM Direct released a scathing report, entitled Fintech Folly: The Sense and Sensibilities of UK Robo Advice, blasting robo-advisers’ business models.

In a blog post, SCM Direct’s founder Alan Miller calls them “insane… What I have witnessed is a ‘get rich quick’ bandwagon, where wishful thinking and hype win over logic, fundamentals and business acumen”.

The report predicts that most robo-advisers will go bankrupt before acquiring the scale they need to be profitable. Merely breaking even will take nearly 11 years, the report estimates.

The same research also criticises robo-advice companies for heavily targeting millennials, whose assets make up a small proportion of the investible market, meaning robo businesses’ chances of making a profit become even slimmer.

Finally, the report argues that an online risk questionnaire cannot take into account clients’ full financial picture, nor assess other significant unconscious information (expressions, body language) they might give and is therefore unable to assess their best interests.

Bridging the gap

It may have its sceptics, but it is undeniable that robo-advice responds to a demand the pensions industry has historically failed to meet.

Employers and professional financial services companies are either not providing appropriate support or are not providing support in a manner that is perceived to add value to these employees

Aegon 2013 report

A 2013 report by pensions provider Aegon, The Young, Pragmatic and Penniless Generation, which surveyed consumers across Europe, found that almost a quarter of young employees (24 per cent) cite friends and family as the most important source of information in choosing how to save for retirement.

The report says: “[This] suggests that employers and professional financial services companies are either not providing appropriate support or are not providing support in a manner that is perceived to add value to these employees… it is essential that employers and retirement companies make haste in filling this gap.”

However, the majority of people are unwilling to pay for advice. The Pensions and Lifetime Savings Association’s 2014 Workplace Pensions Survey revealed that fewer than half of the consumers it surveyed (43 per cent) were prepared to pay for financial advice.

Rise of the robots

From Uber to Hargreaves Lansdown, people are turning to technology to make life easier. Why shouldn’t it play a role in bridging the advice gap, especially for people with smaller pension pots?

As Dan Egan, director of investing at US robo-advice firm Betterment, says: “If you are a young person setting out and you only have $2k-$10k to your name, no adviser will talk to you – but we are happy to.

“On the other side of things my parents are in their 70s, they use iPads, smartphones, they are very comfortable with technology. Our oldest client is 92 years old.”

A common criticism is that robo-advice is not smart enough to give savers – many of whom have nuanced finances – meaningful advice that will not lead them to seek advice elsewhere.

Unsurprisingly, it is an allegation that robo-advisers are keen to refute. Tony Vail, chief innovation officer at UK robo-advice firm Wealth Wizards, will not be drawn on numbers, but says the “majority of people can get a recommendation online”.

Similarly, Betterment’s Egan insists that “the vast majority of people get what they need on the website”.

However, both Vail and Egan are keen to emphasise that robo-advice does not have to mean “faceless”. Vail explains: “We design our online process to pick up people who may not be suited to automated advice end to end.”

Egan points out: “From the moment you sign up, you are receiving emails from real people. For example, during Brexit we had a notification in our system explaining our viewpoint to customers, with a picture of me, who is in charge of investment.

“One of the best things was the number of people who emailed me saying, ‘Thank you so much it was very useful.’ Behind every good robo-adviser are humans.”

SCM Direct’s report predicts that not all robo-advisers will survive long enough to become profit-making. However, the Betterment example from across the Atlantic illustrates just how much potential demand there could be for robo-advisers in the UK.

Egan recalls that in 2013, it had 15,000 customers and $18k (£13.7k) in assets under management, and 21 employees.

Today, it has more than 170,000 clients, slightly more than $5bn (£3.8bn) in assets under management, and 170 employees. “Our biggest problem is keeping up with growth,” he says.

Not all robo-advisers are in the same financial position, Vail adds. “The business model for many robo-advisers, where the main route to market is ‘direct to consumer’, can be challenging due to the cost of client acquisition, especially if they are trying to launch, increase awareness and build a brand and at the same time. This can create real value, but will probably rely on acquired clients consolidating assets and remaining for several years, and can require significant upfront capital.”

He notes that the dynamics may be more attractive for an established brand, such as a bank or fund management company with a large established customer base. 

The third way

Some people within the pensions industry – especially in the fast-growing mastertrusts community – think there is scope for a compromise, where robo-advice could sit as one option among others.

Fiona Matthews, managing director of consultancy Willis Towers Watson’s mastertrust LifeSight, is cautiously optimistic about the role robo-advice could play.

She also points out the lack of a holistic approach: “The frustration is that most systems look at one pension, rather than income from multiple sources, including property, especially if you decide to downsize.”

Matthews adds that, as elsewhere in pensions, engagement is a make-or-break factor. “The other challenge is encouraging someone to engage with it in the first place. How do you coax someone to input all their information in a not-too-long form, which they can return to, whilst engaging them with graphics?”

However, she says: “We are exploring robo-advice and integrating it with our proposition.

“Potentially, it could work at the point of retirement and perhaps then it could play a role again in someone’s late 70s, to help them obtain a secure income.”

Robo-portal

The People’s Pension signposts the government’s guidance service, Pension Wise, at retirement, offers a robo-advice guidance portal via LV=, and offers regulated advice at £49 a session.

Darren Philp, the company’s director of policy and market engagement, says: “In some cases, it is good for people to get face-to-face advice. But there is a general mistrust of advisers and a perception that they are expensive.”

He says robo-advice can make a difference, however, as part of a wider member journey where people move in and out.

“I don’t think we will ever be in a world where robo-advice will be the be-all and end-all,” says Philp. “If it gets complex, you get human intervention.”