The rise of the hybrid-robos: how IFAs can future-proof their businesses
  • Robo-advisors are increasingly focusing on human interaction
  • Robos have found early client acquisition tough and have partnered with traditional financial institutions who already had back books 
  • Hybrid-robo are a threat but lack advice, experience and performance history

Robo-advisors are evolving into a new bionic threat. Scalable Capital has introduced human advisers and Wealthify and Nutmeg are considering it (Shaun Port, chief investment officer of Nutmeg: "We are currently exploring a model where we could combine the best elements of digital wealth management and more traditional financial advice.” And Wealthify chief investment officer Michelle Pierce offered the following: “It is not something that is imminent, but we are considering it, and would certainly not rule it out.”)

In addition Moneyfarm’s CEO recently announced that its latest £40m funding round would enable the business to “focus on greater personalisation of the investment advice we give”.This suggests more human interaction is on the cards – but what does this mean for the robo model as we know it? And more importantly, how should IFAs react?

In the beginning

Robo-advisers in the UK emerged in the aftermath of the Retail Distribution Review (RDR) of 2012 – filling the gap it left in the market with low-cost, automated financial advice. The original mission of these robos was to provide an ‘IFA free’ online investment management solution. Perfect for clients that wanted a risk weighted portfolio without the additional advice and costs of a traditional IFA. 

The robos have spent to date eye-watering sums on client acquisition and gained a solid footing in the market. However, the going was tough and soon we began to see partnerships with traditional financial institutions who already had back books ripe for cultivating – take for example Nutmeg’s alliance with challenger bank Fidor.

Then came hybrid-robo.  

Customers and costs

The biggest challenge for robos is attracting new customers, and reports suggest they are prepared to offer advice, from a human adviser, at an initial loss, if it enables them to build their books. After all, many businesses have been successfully built on the premise of forget the losses…build the distribution. As an example, Scalable Capital appears to offer an initial consultation free of charge, followed by investment advice from a qualified financial adviser for just £200.

To make matters worse, robos are broadening their customer bases. Initially, they targeted a generation of investors who were new to the market (millennials). Investors with larger sums typically required structuring services which left them safely in the hands of the IFAs. But hybrid robo entities are now directly attacking that business.

As an IFA should there be concern? You might be thinking it’s impossible for IFAs to compete with robos that offer human financial advice for a few hundred pounds – we believe it is not.

Time to fight back

Yes, robos are disruptive and ambitious but they lack advice, experience and performance history. In addition, many robo providers offer mostly passive investment solutions with varying degrees of active management.

If these digital platforms are adding a human element, IFAs need to add digital to their advice-based services.

Here are some highly effective ways a non-advised investment management solution can help future-proof your IFA business.

  • Re-engage clients. Clients you had to stop servicing post-RDR will still regard you as a source of trusted financial advice – albeit one they couldn’t continue to afford at the time. Six years have passed and the introduction of a non-advised digital investment service gives you an opportunity to get back in touch. It then enables you to cross and upsell to these reintroduced customers once the time is right.
  • Explore the senior demographic. The bionic digital platform is chasing the mature investor, originally considered technophobic. That was an unfair generalisation; many are willing to use digital tools – as long as they are relevant and fit for purpose. This mature group also makes up the bulk of the investment community so should not be ignored.  
  • Revitalise old, or attack new, distribution channels. You already have the distribution channels the bionic advisers crave – a non-advised solution means an IFA can market it to interested affinity groups – maybe a trade union client for example, or a local charity – they don’t need to worry about regulatory issues. 
  • Attract new clients. The younger crowd of technologically savvy HENRYs – High Earners, Not Rich Yet – present IFAs with a rich seam of untapped investment potential. 
  • Keep full IFA services available. It will take time for hybrid robo to perfect its human advice meets digital platform blend. IFAs already have the human element in the bag; adding the digital element is far less complicated. IFAs also have an existing client base that can be targeted with a comprehensive strategic solution that encompasses a variety of investment needs.

One up on the robos

By enhancing a full suite of IFA services with a digital non-advised solution, the IFA will be able to meet a variety of investment needs – and seek to compete with the low cost robos.

Instead of seeing digital as an external threat – perhaps the wise solution is to embrace it as an opportunity that can supplement and support existing operations. That way you can maintain your position as a trusted, experienced adviser while taking steps to future-proof your business model.

There’s no good reason why robos should have all the fun – if they’re adding human advisers to their mix, complete the circle and add platform technology to yours.

Lester Petch, CEO, FinchTech