In a note on Friday, David McCann, James Hamilton and Jonathan Goslin argue that, while it is unlikely to have a material operational impact on the incumbent players in the execution only and adviser markets, “it will be important to monitor how incumbents react and how the concept in general develops, as it could have a much more important impact long term”.
The reason for these views is, Numis argues, is that similarities can be drawn between the rise of the execution only industry in the 1990s, and the fledgling robo-advice sector, that it views as “a logical hybrid of the best of execution only (convenience, lower cost) with the best of traditional advice (helping individuals to invest wisely).”
While Numis believes there is no right way to position one’s proposition, seeing merit in both avoiding robo-advice entirely to ‘stick to one’s knitting’ and in trying to introduce it as either a value-add service, in the case of execution only players or as an entry level offering by advisers, it points out that there is something to be said for first mover advantage.
“The merit of entering the roboadvisory industry early is clearly that they could take a large share of what could possibly be the fastest growing part of the wealth management industry in the future. Also, due to their greater collective existing brand and distribution, it could also stifle competition from new entrants in the industry: if a big player like HL or SJP were to offer robo-advice at a competitive price, why would anyone choose to use an arguably unproven/unknown provider such as Nutmeg,” the analysts write.
It adds, if the incumbents choose not to compete, there could well be faster disruption.
That said, Numis does point out that, in its view, the risk:reward matrix is more favourable for the likes of
Hargeaves Lansdown, “where [robo-advice] could be marketed as an optional value add service” than to traditional advisers like SJP “where it would be another substitute product, alongside to the growth of execution only, as well as something which could put pressure on fee margins”.
However, all of this is predicated on the assumption that robo-advice will rise in popularity, which Numis agrees is not a given.
“The biggest hurdle we see for the nascent robo-advice industry is ultimately getting the end client to trust their life savings to a computer.”
It adds: “Ultimately we do not claim to know the answer to this question yet on a 10 year plus view, but what we do believe is that start-ups will probably have a harder time getting this investor traction than established wealth management players.”
