Building the best wealth management platforms for investors' online journeys

For any conventional wealth managers, relying on face-to-face contact with clients, worrying whether their industry will, like Planet Earth in innumerable science fiction stories, be conquered by robots, here is a striking figure. An investor foregoing a traditional wealth manager and instead entrusting UK investment manager Nutmeg’s robo-advice service with £1m ($1.25m) would save £511,628 in fees over a 20-year period, according to Nutmeg’s calculations. 

The figure is based on the difference between Nutmeg’s annual fee of 0.3 per cent for portfolios of this value and the 1.24 per cent average which Nutmeg assumes a conventional wealth manager might charge. 

Nutmeg can levy a lot less because customers get no face-to-face contact with relationship managers; they do not, in fact, have a relationship manager at all. Instead, they answer a series of online questions so Nutmeg can work out the appropriate level of risk given their goals and attitude to investing. 

Nutmeg then recommends one of 10 portfolios, all based on investment in ETFs designed to achieve returns similar to conventional wealth managers, and with similar levels of diversification to dampen volatility. Its all-in fee for customers with £1m, after allowing for annual fees of these ETFs, is about 0.5 percent. 

The issue of fees is all the more key to investors because we are in an era of low returns, argues Lisa Caplan, London-based head of financial advice at the five-year-old firm. “Over time, there is only so much return to be had,” she says. “If you’re giving a big chunk of that to your wealth manager, you’re only left with a small chunk for yourself.” 

She also notes that while the interface with the customer is automated, “the actual investment isn’t robo”, since Nutmeg managers adjust portfolios as they see fit. For example, in anticipation of the UK referendum on EU membership in June, “we sold our holdings in UK small caps, and instead invested in US small caps. That worked well for us.” Nutmeg says it is the biggest robo-adviser in the UK, though it does not disclose its total assets managed. 

Complex needs

This is the gauntlet thrown down by online platforms to traditional wealth managers. However, they are sceptical it will catch on for the high net worth individuals whom they serve, rather than the mass affluent with up to half a million pounds or so. 

Their scepticism is based partly on the issue of complexity. “For affluent families, business owners and family offices” – as opposed to moderately affluent individuals – “generally speaking you’re managing a lot of complexity,” says Steven Fradkin, president of Northern Trust Wealth Management in Chicago. 

“Their circumstances are unique, with trust issues, estate issues, family governance issues, tech risk, and all those things that require judgement and engagement and are not as simple as ‘we have an algorithm; if you push this button it’s great’.” 

Mr Fradkin gives an example of a moment when a client needs a person rather than an electronic service: “If they’re contemplating their mortality, and looking at how to set up trusts, how to pass money to their kids, and whether they should give their kids control, these are very important decisions. They will want to talk to us about what the pros and cons of each choice are.” 

Better returns

Conventional wealth managers argue their pure investment management works best. “We believe that over the longer-term we can provide better and more consistent risk-adjusted returns for our clients than robo-advisers,” says Tracey Reddings, head of UK private banking for entrepreneurs and business owners at JP Morgan in London. 

This belief is based, ultimately, on faith in the value of active management at the level of the individual security, rather than active management at the asset allocation level, as practised by robo-advisers.  

“For the types of clients we are advising, active management is ultimately what will deliver the long-term performance,” says Ms Reddings. She notes that to achieve these returns, JP Morgan Private Bank has access to whole asset classes which robo-advisers tend not to invest in, such as hedge funds, private equity and real estate – asset classes which, by diversifying the portfolio still further, increase returns for any given level of risk. 

Robo-advisers acknowledge some of the strengths in the conventional private banking model, based on a mixture of face-to-face interaction, phone calls and emails. “If you’re in the land of trusts, or have complicated affairs in other ways, you need very specific advice,” says Ms Caplan at Nutmeg. She also acknowledges that a wealthy investor with £10m “probably would have complicated affairs”. 

“But if you just want investment the Nutmeg solution is quite compelling,” she insists. “Robo-advice could be very appealing to people with half a million pounds.”

Outsourcing option

One possible solution to the robo/human conundrum is for wealth managers to outsource the portfolio management to robo-advisers, at a much lower management fee than before, and to concentrate on the the complex issues such as trusts, as well as on advising clients on how to respond financially to big life events such as marriage, divorce, children going to college, and so on. Betterment, a US robo-adviser with $5.8bn in AuM, offers this service through Betterment for Advisors. It also offers robo-advice directly to investors.  

When it comes to robo-advice, “our view is that this is going to be the way everyone invests in the future”, says Tom Kimberly, general manager of Betterment for Advisors in New York. “The financial services market, and wealth management in particular, moves relatively slowly in adopting new technologies and products – it took 20 or 30 years for mutual funds to really take hold. We’re only six years in.” 

Betterment, which says it is the first US robo-adviser, was established in 2010. But it is, he thinks, only a matter of time, although it could take quite a while. 

Betterment has a “substantial number” of investors who have put between $1m and $2m into its system, claims Mr Kimberley. It even has some ultra high net worth individuals, though the number of these is much more limited. 

But even if he is right, and robo-advice does prove a truly disruptive technology which comes to dominate the industry, is it necessarily the newish robo-advisers that will win?

Mr Kimberly thinks established wealth managers are hobbled by the past. “Established managers would love to go down this route if they could, but they are stuck with legacy systems, procedures and technology built 15 or 25 years ago,” he says. They would, for example, have to fire most of their staff. 

One established wealth manager which thinks it can be successful in this area is UBS, which in November 2016 launched SmartWealth, a service that targets investors without the investable assets to be served by UBS Wealth Management, initially just in the UK, with a minimum investment of £15,000. However, UBS does not like the description “robo-advice” for this service, preferring the rather less exciting term “digital wealth management”. 

Shane Williams, co-head, justifies this squeamishness partly on grounds that any robo-adviser could use. His argument that “we don’t like to think of ourselves as robo-advisers because we have a very human element” could be cited by Nutmeg and Betterment, for example, since real people are devising the portfolios which a computer will then recommend to the client.

There is, however, at least one important difference to self-described robo-advisers: the scale of the human backup that leads to SmartWealth’s portfolio construction. SmartWealth can piggyback on the huge investment in the reams of highly skilled analysts paid for with the large fees charged by UBS Wealth Management. Nutmeg, by contrast, only has six. SmartWealth also offers active online wealth management, for a higher fee than the passive model. SmartWealth is, on the other hand, more expensive than the self-styled robo-advisers, with all-in fees of 1 per cent for the passive and 1.7 per cent for the active offering. 

Getting easier

Some technology experts argue, in counter to Mr Kimberly’s view at Betterment, that it will become progressively easier for conventional wealth managers such as UBS to break into the mass affluent market, because the gizmos are growing better. 

One of the most sophisticated gizmos is IBM’s Watson computing system, a form of “cognitive computing”, where a company’s system understands the world the way humans do – through senses, learning, and experience – and continuously learns from previous interactions, gaining in value and knowledge over time.

If private banks use Watson, they “could also serve a segment of the market that they don’t serve at the moment”, says David Robson, IBM’s European Director for Watson Financial Services in London, namely execution-only accounts in the mass affluent category.

This could be made possible through Watson’s ability to provide the kind of assistance and advice usually associated only with real humans. Access could be through a phone or a text conversation with the computer. 

For example, “if an article in a newspaper says that Chinese equities are expected to soar in the next three months, and there was no contradictory evidence, then Watson would be able to tell you Chinese equities are expected to soar”. It can provide this kind of advice by digesting enormous amounts of research covering a huge number of possible topics – far more research than any human could. 

Mr Robson makes clear, however, that this advice is not quite human. “It can apply judgement, but it is applying other people’s judgement” – in the case of Chinese equities, the consensus judgement. This is not the same as a private banker telling you that they, or the private bank as a house, do not expect Chinese equities to soar.

Watson is also capable, says Mr Robson, of making investment recommendations based on its understanding of the client’s attitude to risk, as conveyed through analysis of the client’s language over time. It could, in this sense, replicate a wealth manager by building up a better knowledge of the client as the months and years progressed. 

Some conventional wealth managers are looking at the possibilities of Watson, claims Mr Robson, though fewer than 10 have reached the Proof of Concept stage, where Watson and a potential client work on whether a particular goal is capable of being achieved by Watson’s technology. 

But there are still limits to the use of computing in private banking. Mr Robson gives the example of a recently widowed woman who suddenly has to consider her financial affairs for the first time, after decades spent relying on the husband to take care of things. 

“Watson could be trained to perform that service” – and in a sense this would be a good idea “because it wouldn’t be an unusual service,” he says. “But would someone in that emotional state want to talk to a human or a machine?”

Speaking more generally, Mr Robson concludes: “The cognitive agents are there to help, support and guide, not to be creative or to be imaginative, as humans are, so I think there will always be role for humans in wealth management.” 

Private banks journey into digital future

Short of offering full robo-advice, wealth managers are digitising their operations in less spectacular ways, in the interests of customer convenience, efficiency and cost containment.

For JP Morgan Private Bank, investment in digitisation “is more about convenience, intellectual capital and information than about cost”, says Tracey Reddings, head of UK private banking for entrepreneurs and business owners at JP Morgan in London. 

“Access to digital platforms’ information about markets, portfolio performance and so on means clients do come to market much more informed than five years ago,” she explains. “They can challenge us much more around how we manage the portfolios.” It is a kind of democratisation: “Digital makes experts of us all.” 

Northern Trust Wealth Management has invested in services to enhance the client’s experience, such as its Goals-Driven Wealth Management platform. It has also put money into making it easier for its “partners” (the name given to all employees) to do their job well. 

Steven Fradkin, president of Northern Trust Wealth Management, describes its new Partners Workstation, launched in the summer of 2016, as “a single pane of glass through which we can see a client’s entire relationship with Northern Trust, rather than having to check 12 systems and manually write down what it is”. 

In some areas the same service that makes life easier for clients also cuts costs for the wealth manager, thereby killing two birds with one stone. 

“It’s often the highly paid front office guy who ends up doing tons and tons of admin, telling clients things like: ‘I need you to fill in a form because you’ve moved house’,” says Gary Linieres, CEO at London-based Wealth Dynamix, which provides customer relationship management systems to wealth and investment managers. The wealth manager’s customers would also like, in many cases, to settle this electronically. 

Digitisation also makes it easier for clients to meet the requirements of the regulators, he adds, such as the UK Conduct of Business rules that require wealth managers to treat their customers fairly and give them suitable advice. Showing they are doing this is easier if there is a clear electronic trail. 

But although these digital advances may save wealth managers some money in the longer term, they also require considerable initial investment. Mr Linieres gives the example of C. Hoare and Co, which in October announced plans to sell its £2.2bn ($2.75bn) wealth management business to Cazenove, Schroders’ much larger UK wealth management arm. 

Justifying the sale in a statement, Hoare referred to the need for “meeting the requirements of the regulators and new challenges of technology”.