Should fund buyers fear robo advice?

Global automated advice market predicted to hit £1.2trn by 2023


In the middle of June, Allianz Global Investors announced it was broadening its partnership with robo-advice firm Moneyfarm, to expand operations into its home market in Germany.

Having already successfully trialled the robo advised wealth management partnership in the UK, the fund group said the exclusive tie-up with Moneyfarm would allow German investors access to Allianz’s actively managed funds, while providing investment guidance from a dedicated team of investment consultants.

But as momentum for robo-advice continues to build across continental Europe, fund selectors may rightly be questioning how far this trend towards automated advice will go – and where it leaves them in the value chain.

What does the Allianz move tell us?

With Moneyfarm having some 40,000 registered customers across Germany, Italy and the UK, Allianz’s hook-up with Moneyfarm is the latest attempt by a fund manager to distribute products directly to a large number of investors through a digital platform.

There is no denying that robo-advice is growing in Europe and making a dent in the intermediated fund market.

Data from global consultancy firm Roland Berger reveals robo-advisers in Europe managed around €14bn (£12.7bn) of assets in 2018, making Europe the third largest market after the US (€386bn) and China (€80bn).

With the global robo advisory market predicted to grow from €490bn assets under management in 2018 to €1.3trn by 2023, a near 40% increase, according to Roland Berger, it’s a sector that fund companies are watching as a potential channel to improve their increasingly squeezed margins.

Country-specific differences

However, BCC Risparmio & Previdenza head of fund selection David Karni says while he expects the robo advice industry to attract more players, he doesn’t believe it will pose a significant threat to fund selectors – particularly in regions like Italy where regulatory barriers may prevent real growth in automated advice.

“Robo advice works very differently in different countries. The two extremes are the UK and Italy. In the UK you already have some example of robo-advisers, because of the regulations and the economy of scale. In Italy, every investment is guided by the distributors and the rebates system,” Karni says.

“If the UK model will be the rule in the EU in the next few years, and Mifid II evolves in a straight direction, I can imagine that more and more advisers, fintech companies, and web portfolio constructors will appear. Companies like Vanguard, which has created an advisory platform to sell directly, can be a game changer. But I’m not sure that the Italian system is ready to do this – although regulations can change everything in few years,” he adds.

French fund manager Amundi told Portfolio Adviser‘s sister title Expert Investor that while it has adopted robo advisory tools, it also realises the importance of human advice.

“We need to adapt the way we work to be able to offer savings solutions that take into account new technological developments. This is the reason why we invest a lot in our own IT platform. However, we believe that our business is, above all, to advise clients with a global approach to their assets. That’s why we must be both 100% digital and 100% human,” a spokesperson at Amundi says.

Nevertheless, Amundi has certainly embraced the robo sector. In November 2017, Amundi Epargne Salariale et Retraite launched the first robo-adviser to help employees choose employee savings investment, and has more than 3 million users.

And in January 2019, the French fund manager purchased the entire share capital of fintech Anatec, a robo-advisory platform.

Then of course, there’s Germany. It has the second biggest robo advice market in Europe after the UK, holding €4bn in assets, according to Roland Berger data.

German banks and fund managers that have ventured into robo-advice include Quirin Bank, Sutor Bank, and European Bank for Financial Services (ebase), who are all providing their own robo advisory services, while Deutsche Bank has opted to use the white label robo-advice solution Fincite.

Adding to the list is German asset manager Hauck & Aufhauser, which acquired robo-advice firm easyfolio in May 2016.

No comparison

But despite more fund managers eyeing up this direct-to-consumer market, Karni asserts that robo advisers are not in direct competition with fund selectors due to their different functions – and believes that, in time, the market will split in two – with clear distinctions between robo firms and traditional distributors.

“In a few years I think we will have different markets for the two: robo for the retail side and distributors for wealth management.

“The work of fund selectors can continue because it is a different task. I see robo advice more on the portfolio construction, or asset allocation and rebalancing of existing portfolios. To select a good fund will be the second step, and I believe that this task cannot be completely automatised,” Karni says.

The robo advice industry also remains, for now, a bit of a hit and miss sector. While there are some successes, there have certainly been a number of high profile failures.

In May this year South African financial services group Investec decided to close its direct-to-consumer robo-adviser Click & Invest, after operating losses reached £26m over two years. The investment giant blamed the failure on low appetite for the service.

As robo continues to be marketed to younger generations who are less sceptical about using automated advice, growing market share and attracting older investors who have more money to invest remains an obstacle.

Similarly, Swiss banking giant UBS closed its robo adviser SmartWealth in August last year, less than 18 months after it launched, stating that the UK-based offering had “limited” commercial potential.

With commentators predicting a mixture of further withdrawals, interspersed with a few major successes, it could still be some time before automated advice allows European fund managers to drastically alter their distribution strategies.

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