“Just because you’ve built it”..Some home truths about robo-advice.

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The problem with Alan and Gina Miller is they are right, and they say the things that the financial services industry don’t want to hear. Before the TTF was a gleam in our eye , they were proving we were paying more in hidden charges than through the AMC. They have blown the whistle on the extravagance of charity boards in managing their internal costs and now they are shining clear daylight on the fundamental problem with rob-advive. It isn’t viable.

I have just completed a response to the FCA who are calling for evidence on their latest Retirement Outcomes study. In it I conclude that individually managed solutions for the mass market are too expensive, too risky and most importantly are not what most of us want.

The politically unacceptable reality is that the only way of effectively paying the lumpen proletariat (of which I count myself a member) their pensions, is collectively. We have failed to make individual annuities work, advised drawdown work and we are showing no sign of making non-advised drawdown work- robots or not.

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Here is Alan Miller’s brilliant paper on why the economics of individual drawdown are perilous at best!


Robo-advisers are financially unviable

By Alan Miller, Founding Partner and Chief Investment Officer, SCM Direct

Robo-advisers are seen by many as the saviours of financial mankind – they are going to solve the mythical advice gap, make great investment decisions and make their financial backers millionaires.  In reality, most robo-advice models are simply offering direct to consumer investment solutions, via exchange-traded funds rather than genuine advice.

SCM Direct researched 10 UK ‘robo-advisers’, and found their average fee excluding VAT for a £25,000 portfolio, was 0.59% pa i.e. £147.50 per annum.

As start-ups, most ‘robos’ do not have brands so require well-funded strategic marketing campaigns. We estimate a successful online campaign costs circa £3.15 per click.  Based on a conversion rate of 1.75%, the customer acquisition cost is £180 per account.

The robo-adviser business model appears to be employing, more investment management staff, more IT staff, more sales and marketing staff, more customer service staff, and more compliance staff.  Even if they could achieve the average cost base (0.52% of AUM) of four leading large private wealth managers/direct platforms, the cost of managing a £25,000 account is £130 per annum.

SCM Direct calculates that it would take nearly 11 years to make a profit.

SCM Direct calculates the time it would take for robo-advisors to make a profit

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One new UK robo-adviser firm in an article by Citywire, said “I wouldn’t expect to be reaching breakeven before we have £2 billion AUM,’… We’re talking about several years, maybe five or six.”  

The various venture capitalists, private equity and professional private investors are flushing their clients money down the toilet via UK robo-advisers.

Vanguard Group have reported that their redemption rate is currently close to 40%, bringing the average holding period down to about 2.5 years, according to http://www.wealthmanagement.com.  We believe that a 3-year estimate is a good guide to UK robo-advisers, given their younger investor targeting so by the time these robo-advisers could in theory make a penny, their clients will have gone!

Regulatory Issues – Significant Potential Liabilities

We found evidence of misleading statements, misleading performance, misleading fees, and a lack of appropriate regulatory permissions.


One robo-adviser showed performance by converting the returns of its euro portfolios prior to 2015 into sterling, even though an employee told us that these euro portfolios “are different to the UK ones”.  Furthermore, these returns were shown before “taking account of their fees”.


SCM Direct’s research found that 80% relied on client risk questionnaires to select investments yet 25% did not possess regulatory permission to give advice to retail clients. 

In our view, if a ‘robo-adviser’ chooses a strategy based directly on answers to specific personal questions, then surely this must be advice, as it is based ‘on your information’ and is being presented as suitable based on your particular circumstances.

Anyway, it is highly debatable as to whether robo-advisers are giving advice in the widest sense that the name ‘robo-adviser’ might suggest.  Many do not look in detail at the overall financial attributes and requirements of each client.

In 2011, the Financial Conduct Authority (FCA) reviewed 11 risk-profiling tools and found that nine of the eleven tools had weaknesses which could, in certain circumstances, lead to flawed outputs.

The top securities regulator in Massachusetts recently stated in a Reuters article that “fully-automated robo-advisers, as they are typically structured, may be inherently unable to act as fiduciaries and perform the functions of a state-registered investment adviser

The UK Financial Services Panel has rightly pointed out these risks to the FCA: “Tools that are poorly developed and/or monitored have the potential to give rise to widespread systemic mis-selling and therefore further undermine confidence in the sector.”

Fees and Charges – Highly Confusing

One of the most appealing competitor advantages of robo-advisers compared to traditional incumbents is their lower fees.  However, only 30% added up all their own fees, all the underlying investments costs, and other charges to produce one overall total fee number.  In fact, none of the companies provided any indication of the full underlying transaction costs including the spreads, even though ETFs will naturally have a spread between the buying and selling price.

We found numerous statements on fees and other matters within the sites analysed, which were extremely misleading in our view.  We even found one site where the legal documents were missing most of the pages.

Our conclusion is that there is little evidence of robust innovation, as new robo-advisers appear to be fundamentally financially unviable and/or seem to be regularly flouting key FCA rules.

(The views expressed here are those of the author and do not necessarily reflect those of ETF Strategy.)

I would add one final issue – MASS DISTRIBUTION

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The Government aren’t worried about those who can afford advice, or even those who seek out robo-advice, they are worried about the great majority of people who take no advice and simply cash out their retirement pots.

They are our “en masse”, cashing-out is the default option for the mass market and everyone is agreed that it is not a good default option.

To get people to do things “en-masse” you either have to compell them, auto-enrol them or create a default solution that requires no brain.

I run a robo-advisory business where the bulk of our customers come to us because they think choosing a pension (using http://www.pensionplaypen.com) is a part of the service they have bought through payroll.

We are increasingly integrated into the sales process of organisations as varied as Sage and myPAYE, that our customers consider us an activity of auto-enrolment.

For robo-advice to become an activity of retirement planning , then it is going to needs be fully integrated into the retirement propositions of those who manage our DC pots.

But whereas http://www.pensionplaypen.com is operating in a virgin territory with virtually no competition and precious little regulatory scrutiny, robo-advice is having to compete with every man and every regulatory dog.

Our Government is committed to market led solutions, I have little confidence in mass-market solutions that depend on individual decision making.

Businesses purchasing workplace pensions on behalf of staff are one kind of buyer, staff purchasing “rest of life” retirement planning solutions for them and their family is another.

Gathering your customer base on a pay for clicks basis (as Alan suggests robo-advisers are doing) is not a mass market distribution strategy, it is a recipe for mutual self-destruction. The robots will kill each other on the battleground of Google.

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About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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2 Responses to “Just because you’ve built it”..Some home truths about robo-advice.

  1. Brian Gannon says:

    really interesting article. CDC can only occur by state intervention because there is no commercial interest for existing fund managers providers or advisers to innovate something which slashes their profits. politicians use pensions as a political football so there is little chance of a quick intervention and if it did happen it would not be thought through. as a left leaning person I am not against state intervention. as a pragmatic person, the state will muck it up. so what the championing of robot advice shows is a blind devotion to a great idea but a blinkered view of the sheer cost of developing genuine robo advice algorithms. and even if advice could be robotised (which in time it can be) that still would never lead to investment solutions that work. future returns interest rates inflation and life expectancy will always be unpredictable. actuaries have got it spectacularly wrong because maths is not the answer. the real answer is to save more when working and to spend less. and when people rely on investments rather than annuities they have to spend less when that happens. people need to understand common sense applies to pensions as well as life. annuities are not the answer either. people live too long for flat annuities to protect their spending power against inflation. people die too soon for index linked annuities to be effective and right for many others. the basic problem with retirement planning is that for most people they don’t do it. so if you don’t plan then you don’t know what you need and nor do you understand that things keep changing. save more spend less is not sexy. so AE contribution rates will need to increase substantially and opt out will have to disappear. people do not behave logically when logic dictates save more spend less. compulsion is the answer. that answer is also not acceptable to the populace so we have the current mess.

  2. henry tapper says:

    I agree Brian, but we can encourage people to save more, work longer and spend less by giving them products that help. People are currently incentivised by tax into products they don’t trust, wouldn’t it be better if we changed that into “products that they do trust”? We have had such products- the state pension, the second state pension and occupational pensions, none are quite right for the job you describe – helping people save voluntarily – but they give us useful clues.

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