May 3, 2017

Data and analytics in robo-advice: Key to customer proposition and provider scalability

Jonny is a consultant and content writer in the fintech sector. he left the FT in 2016 where he covered financial services.

Smart Platform blog
Robo-advice is a growing phenomenon with huge potential to serve today’s more engaged and underserved consumer.

It is a hotly debated and divisive subject matter, with some questioning the coining of ‘robo-advice’ maintaining it is more akin to discretionary investment management, while some financial advisers treat it with scepticism, deeming it a threat to their business models. Yet it has started to open up and democratise the investment world, making it more accessible and inclusive, and a whole lot simpler, cheaper and efficient. 

While still a relatively small market in the UK, its rate of growth is rapid and accelerating. According to Business Insider, UK robo-advisers will manage around 10 percent of total global assets under management by 2020, equating to around $8tn in robo AUM. This is why it continues to be a focus for both start-ups and incumbents, anticipating the huge potential of value it offers. Consumer expectations are high, at least in part a sign of the digital times, augmented by the positive experience of digital in people’s daily lives. Finance is, for most people, a complex, laborious and impenetrable field, so there is genuine demand for simple, agile, low cost digital solutions, that are delivered in real-time with enhanced outcomes. 

The leveraging of data and use of algorithms have helped to satisfy the thirst of today’s consumer. The result is tailored investment recommendations and automated portfolio allocation that closely match customers’ specific values, lifestyles and appetite for risk. Free of human biases, and with the ability to automate the rebalancing and tax harvesting process, robo can keep an investor’s portfolio optimised, on track and running seamlessly in the background. The demand for greater transparency can also be answered with efficient reporting capabilities and a full audit trail and clearly laid out costs, all part and parcel of robo. 

While robo application has predominantly been in portfolio management, its potential goes far beyond. Big data and advanced analytics appear set to broaden the range of advice that can be developed through algorithms. The advice can evolve beyond long-term investments into much more disruptive and wide-ranging forms. 

This is a pertinent reminder that to scale and remain relevant and competitive, firms will likely need to embrace robo in some shape or form, be it a hybrid or omni-channel offering. This will ensure they will not lose out to robo start-ups, and will grant access to the sizable millennial market. Many have already invested heavily according to Deloitte[1], seen also with the flurry of acquisitions of robo propositions by asset management firms, such as BlackRock. 

Robo-advisers can use big data and advanced analytics to optimise portfolios with goal-driven portfolio construction, advanced risk management techniques, and their processes are easily scalable. Web behavioural data and other data not currently analysed contain patterns that are hugely valuable. Predictive analytics can predict interest and intent, which will greatly enhance user experience and give a much more personalised and precise value proposition. Algorithms can interpret multiple sources of data to gain deeper insights into a person’s assets and liabilities, behavioural patterns and lifestyle. Those insights can then be used to construct and optimise a portfolio with appropriate risk and return objectives, and could evolve in a complete managed platform with unified accounts and advice in other areas. More complex advice will also be available with emerging technologies such as cognitive computing and artificial intelligence, which will add another dimension to robo by analysing behavioural profiles and predicting life events. It could even identify potential areas for new product development based on client needs and activities. Robo-advice capabilities will greatly increase over time. According to Accenture it will be able to consider a person’s complexities by adapting questions based on earlier responses. 

“In developing a financial plan, they can assimilate multiple goals, including college savings, planned home purchases, retirement, protection needs, estate planning and healthcare and/or long term care. In proposing investment solutions, they will be able to incorporate outside assets, handle individual securities, ladder bond portfolios, consider low tax basis holdings, and allocate around illiquid positions.”[2] The 

EU General Data Protection Regulation, which will take effect in May 2018, adds another dimension. The regulation will introduce a right to data portability, and enable customers to share and consolidate data that has historically been scattered across their financial services providers. Conceptually, rather than our data being used by companies to try to sell us things that we may not want, CDPR acknowledges that data about us should be controlled by us. We can direct it to products and services we consider beneficial to us. 

Data and analytics is the key enabler, powering personalisation, engagement and value-adding services for everyday working people. Over 8 million people in the UK do not save enough for retirement and according to the FCA/Treasury Financial Advice Market Review (FAMR) published last year, up to 16 million people are trapped in the advice gap, meaning they need advice but are unable to afford it.[3] With the rise in DIY investing – two-thirds of retail investing in the UK is done without advice – automated regulated financial planning advice is seen as the way forward. 

“FAMR believes that creating an environment that supports firms in delivering ‘streamlined advice’ within the MiFID regime will have a positive effect on the market. This is particularly the case for online automated advice models that have the ability to deliver advice in a more cost efficient way,” the report states. 

With a mission to make financial advice accessible and affordable, Wealth Wizards Smart Platform is a streamlined digital offering set up to provide genuine regulated financial planning advice that is affordable and frictionless. Combining the algorithmic aspect with an element of the human, users get a personal recommendation – approved by a chartered financial planner. It is the UK's first fully-regulated online adviser, and the country’s only at-retirement online advice provider, powering LV's Retirement Wizard.  

Robo advice is reshaping the landscape, ensuring consumers are better served and with access to financial advice at all key milestones in their lives, and with affordable solutions that engage and help people feel in control of their finances. Automated advice will become a standard expectation in the digital world and will evolve into much more wide-ranging forms of advice. Semantics aside, all must embrace it.

 [1] Deloitte, Robo-Advisers: Capitalising on a Growing Opportunity, 2015. 

[2] Accenture, The Rise of Robo-Advice: Changing the Concept of Wealth Management, 2015.

[3] FCA & Treasury, Financial Advice Market Review: Final Report, March 2016

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