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Juan Colón, CEO and Founder of Darwinex 

The robo-advisory market has been making a name for itself lately, but this attention has not come without controversy. Tying into the wider debate around AI (artificial intelligence), many in the financial industry have been questioning whether a function traditionally carried out by humans is really ripe to be replaced by machines.

Last month, RBS announced their plans to sack over two hundred human advisors in favour of robots, and the FCA has also created an Advice Unit that will help firms to develop robo-advisor models. New platforms such as Nutmeg and Wealthfront have gained significant traction this year, armed by bold claims of what appears to be the offer of a cheaper and seemingly more accessible service. However, despite the most obvious benefit of cost-reduction, are they really able to provide a better service?

Human vs. machine

Current Investment products are produced with an industrial mind-set: because acquiring and managing customer assets offline is expensive, wealth managers run a factory to create the product, and a distribution network to market them.

The product factory involves a range of experts designing investment strategies. A long value chain spanning risk management, back office and compliance package it. Sales teams then push the product marketing strategies for best serving end-customer needs. What makes the “right” product is debatable – as there’s often a conflict between what really suits the customer and what generates the higher revenues for the sales team.

Nutmeg and other robo-advisory companies apply some evolution to this approach. A slick, intuitive online interface, independent from the product factory essentially replaces traditional sales. Independence between the robo-adviser and the end-product precludes conflict of interest. Unlike traditional providers, Nutmeg and similar platforms own no product and their experts pick, out of the options on offer, the cheapest that meet customers’ needs. Other painful product features, such as lock in periods, are thankfully kept to a minimum.

Unlike human distribution networks, robo-advisors have the advantage of being nimble – the online interface serves millions at a marginal cost. They are unbiased, and they are run by independent experts, for the customers’ and not for the robo-advisors benefit.

Are they really a better option for investors?

Ultimately however, robo-advisors still build on two premises. The first is self-appointed experts. Once the cost-saving costs are taken out of the equation (and cost-reduction is valuable) what makes Nutmeg’s experts better than other experts? What do Nutmeg & Co offer to credibly prove their expertise? Little – if you dig into it.

The second is the product factory – the slick interface presents no new products. Ford once changed the car industry by offering an affordable car anyone could have in any colour they wanted – as long as it was black. Nutmeg’s presents products beautifully, allocates customer assets with customers’ interest in mind – but ultimately in the very same factory products.

This means that robo advisors, whilst ‘cutting out the sales middle man, still rely on the very same product they claim to disrupt.

Given this, it feels too soon to be announcing the end of the road for traditional providers. Robo-advisors are a welcome development in removing unnecessary cost and conflict of interest, and they are arguably more customer-aligned. However, other than the risk of cannibalising products and existing profitable customer-relationships, nothing stops incumbents from adding robo-advisory to their suite of sales channels.

Once this happens, VC funded robo-advisers may struggle the old-fashioned way to make the numbers work. To date, new entrants into this market have attracted significant funding with a simple premise assumption. Because customers have been traditionally loyal for years (have you ever tried to switch pension providers?), luring new customers away from banks with ads paid over time.

Whether or not this assumption holds once switching becomes easier – and propensity to switch increases – is another question. If customer loyalty is eroded, how will robo-advisers economics work, especially as they purchase their product from the very wealth-managers and banks they compete with?

The fact that there is little to stop other VCs from funding ever more intuitive clones of Nutmeg’s interface and ultimately steal customers away.


Crucially, you can never under-estimate the power of having a face-to-face, human relationship with your advisor. Whilst the performance and cost of robo-advisors might seem appealing, in reality, these factors form only a very small part of the equation, and they still have inherent weaknesses.

Robo-advisors are definitely a step in the right direction in eliminating the ‘old boys’ culture of investing, but the fact is they only optimise part of the problem – distribution. In the juicer industry segments in particular, customers may well choose to pay for human service going forward, but whether or not interfacing with a robot, rather than a human, proves to be more than just a way to save costs in the long run, remains to be seen.

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