Robo-advice has become one of the more popular and prominent financial technology innovations of the last few years, and it’s easy to see why. However, Lester Petch, CEO at FinchTech, reckons there’s cause for concern, and below talks Finance Monthly through five reasons robo-advice may not turn out to be all it’s promised without confronting some hard-hitting issues.
In theory these platforms offer expanded access to financial advice and fill a widening RDR gap, at a lower cost and with superior ease of use. Citigroup estimates that assets managed by robo-advisors could reach a collective value of $5 trillion over the course of the next decade - and that is certainly something to aim for.
Excitement and optimism should always be tempered with pragmatism however, and practically speaking, there are reasons to be concerned. Many available and in build platforms promise innovation, efficiency, and accuracy, but have some major potential hurdles to overcome.
- Build cost and overspending on customer acquisition
Robo-advice start-ups are often unknown quantities, and must therefore build from scratch. Many rely on digital and social marketing campaigns, alongside referrals, o generate revenue. The problem is that these campaigns are often expensive - sometimes hideously so. Nutmeg, for example, posted a pre-tax loss of £9 million in the last fiscal year, even as marketing and staff costs hit £10.8 million.
It’s not altogether surprising that when cost of acquisition (CAC) for clients exceeds overall lifetime value (LTV), firms lose money. The assumption is that these expensive omni-channel campaigns will of course be successful, and eventually skew the CAC to LTV ratio back in the company’s favour. This is however a precarious position for any business to find itself in, even one with fantastic technology. Deep pockets are required.
In some cases the aim might perhaps be for the business to accumulate enough assets under management to enable a sale or exit, however this is also a risky strategy. Recent 2016 research by SCM Direct, a UK wealth manager, suggested most UK robo-advisers “will go bust before acquiring the sizeable assets under management to ensure their sustainability”.
- No real performance history
Sophisticated software is no substitute for experience. Many robo-advice platforms haven’t weathered any serious economic storms. Many have little performance history at all and rely on back testing. How much can you trust in a technology that has never been truly tested in the heat of battle, or weathered an event such as a recession or cataclysmic sell off?
- Limited suitability
Robo-advice platforms may be at risk of not always accurately assessing risk tolerance – which can cause serious problems in an economic downturn. Recent research from FinaMetrica found that 21.2% of the firm’s 100,000 customers incorrectly estimated their true risk tolerance by a significant margin, when using a psychometric risk test. Platforms could be vulnerable to recommend investments that are beyond or below the client’s capacity for risk, especially in the event that the markets exhibit extreme volatility.
- Reliance on algorithms
In an age of sophisticated and improving technology, reliance on this tech has led some to treat algorithms with an almost mystical reverence. Many are truly impressive, but can clients truly understand them? No algorithm is perfect, and many are unproven and untested in reality. They’re theoretically created to take human error or preference out of the equation, but human error can be a factor in their design and development. Could a mistake lead to catastrophic consequences for clients and do they know what they are buying into?
- Lack of differentiation
For all the talk of the market’s innovation and creativity, it’s often hard to tell one robo-advisor from another. The major differences tend to be cosmetic, a technological bell here, a branding whistle there, and little differentiating focus on the client’s needs and priorities.
Those robo-advice platforms that enter the market in the near future with more niche or specialised offerings aimed at specific market segments such as cultural groups or different age brackets, are more likely to gain traction, as well as potentially spend less on client acquisition
In conclusion, robo-advisors will need to overcome these problems and more to achieve long-term viability. This isn’t to say that the technology isn’t exciting, the need isn’t there or that it doesn’t have huge potential. The right platforms could potentially redefine the market, and digital investment management is a step in the right direction. If digital investment management platforms can iron out the kinks and focus on what works for their own business model, and more importantly their customers, there is a bright future ahead of them.
An Interview with:
· Marc Vollenweider, Co-founder and Chief Strategist
· Ashutosh Gupta, Co-CEO and Global Business Unit Head for Financial Services
· Ravi Mehrotra, Co-CEO and Global Business Unit Head for Corporates and Professional Services
Founded as a start-up in 2001, Evalueserve is a global professional services provider offering research, analytics, and data management services. The company is powered by mind+machine – a unique combination of human expertise and best-in-class technologies that use smart algorithms to simplify and automate key tasks. This approach enables Evalueserve to design and manage processes that can generate and harness insights on a large scale, significantly cutting costs and timescales and helping businesses to overtake the competition. The company works with clients across a wide range of industries and business functions, helping them to make better decisions faster, reach new levels of efficiency and effectiveness, and see a tangible impact on their top and bottom line.
This month, Finance Monthly had the privilege of speaking to Marc Vollenweider - Co-founder and Chief Strategist, as well as the company’s new Co-CEOs - Ashutosh Gupta and Ravi Mehrotra, who tell us all about the mind+machine concept and Evalueserve’s mission.
Marc, you have recently shifted your role from the being CEO to becoming Evalueserve’s Chief Strategist, can you tell us a bit more about this transition?
Marc: After spending about 16 years as Evalueserve’s CEO, I decided that it was time for the next generation to get involved in running the business, from an operational point of view. We decided to go with a Co-CEO structure, by splitting the role between Ashutosh and Ravi, while I shifted to a full-time board role, which allows me to concentrate on innovation-related projects. I am still strongly involved in the company, but instead of dealing with the day-to-day operations, I focus on proposing strategies and examining our next steps for the future.
Tell us about the experience of writing a book while running a global business? How have mind+machine and the book influenced Evalueserve and its business?
Marc: As soon as the idea about the book came about, it was clear that I wouldn’t be able to combine writing a book with my full-time CEO role. Thus, I took some time off, between March and June 2016, and wrote the book, while Ashutosh and Ravi got to practice running the business on their own. The experience of authoring a book on its own was extremely rewarding and I am proud of the final result.
The mind+machine concept is something that we started working towards 5 years ago, realising that a people-only approach was becoming too slow and too costly. We saw an opportunity for automating tasks and processes, and using machines to run repetitive tasks. We started coming up with workflow platforms, productivity tools, analytic engines, better knowledge management, etc. and fully rebranded the business. If we compare Evalueserve today to the company it was 5 years ago, I’d say that we have reached a productivity increase of about 30-40% on a per head basis. Mind+machine makes us faster - it makes the quality of our work better, and it gives our clients new capabilities to work with.
In today’s world, clients want to see innovation, so developing mind+machine has been essential for Evalueserve.
What are the benefits of a dual CEO-structure?
Ashutosh: At Evalueserve, we are very client-centric and also serve a variety of different industries. The fact that I have previously worked within financial services, while Ravi comes from a more corporate and consulting-oriented background, allows us to focus on these very different client segments. It also provides us with two different points of view and diverse ideas when it comes to dealing with common areas like HR, policies, marketing, etc. So the Co-CEO structure actually works really well for us.
Ravi: Given the scope and scale of Evalueserve, being a very large and complex business, we want to make sure that we divide the different areas of the business and responsibilities between each other.
Additionally, the dual CEO structure, although not new, is still very rare and unusual. One of the reasons why it works for us is because, before embarking on this, we already had a very strong working relationship, with both of us having spent over 6 years in Evalueserve.
What are the main challenges that decision makers are facing today? How can mind+machine help overcome these challenges?
Marc: There are millions of decisions that need to be made in a company on a daily basis. And I’m not talking only about the decisions that the executive board makes; at Evalueserve we’re looking at decision makers at various levels of the company - from the CEO to the service technician. So for these millions of decisions, naturally, there’s a very large number of analytic use cases.
The problem of decision-making includes the logistics of having the right data at the right location, at the right time. Then, these decisions must be transferred into a workflow where they get converted into actions and create impact. How does mind+machine help with all of this?
Unfortunately, when you look at how many decisions are being made within an organisation today, you’ll still see a lot of manual work. There are a few workflows, which make the life of decision-makers significantly easier. Mind+machine provides the client with the ability to crack the analytic use cases and then put a system or a machine in place to get them done on a recurring basis, as well as a platform that has all the necessary data feeds and analytics, and most importantly, links multiple end users and decision-makers in a collaborative way. This results in fast and efficient decision-making processes, with the knowledge management being done within the platform, so it doesn’t have to be redone every time.
Why do analytics matter for almost all types of businesses?
Marc: In today’s world, analytics are critical, solely because a lot of decisions within an organisation depend on diverse and complex data, which wasn’t so much the case up until 15 years ago. When it comes to decision-making, we need data that has been prepared, analysed and converted into insights and decision-ready output.
Today, every business needs an increasing amount of analytics because they improve the return on investment of many processes – it’s as simple as that.
How can one set up the use-case thinking in the company?
Marc: Use cases have a number of implications for the whole company. Currently organisations tend to mingle everything together in a big pot - they set up central data scientist teams and large data lakes from where the teams try to come up with analytic output. However, this approach frequently leads to White Elephants not serving the end users’ needs well, often with negative Return on Investment (RoI). Companies should move to a culture of individual-focused analytic use cases.
A use case is not just an analysis; it comprises the data flow, the analytic engine, the UX (User Experience), the knowledge management for improving re-use, and the link to the overall workflow. Only in this way can the end users get what they need and achieve positive RoI.
It is my belief that this cultural change needs to be driven by the C-Suite, including the Chief Data Officer, who should jointly agree on putting this philosophy in place. Setting up the use-case thinking in a company should start with an agreement between the highest level executives, who should then drive it into individual units, so everyone gets into this mode of thinking over time.
How does Evalueserve use use cases to help its clients with decision-making?
Ashutosh: At Evalueserve, we have a whole collection of analytic use cases that are well-documented. Thus, when a new client comes to us with a business problem, we can easily leverage our database where we’ve cracked similar use cases before and come up with a specific solution, while saving our client a lot of time and money.
Ravi: Additionally, our use case hub is also helpful when it comes to showing our clients what mind+machine means. We’ve gathered all of these concepts that we are developing into a product, and have created a collection of use cases that we’re able to demonstrate to our clients at all times. The use case hub also enables the Chief Data and Chief Analytics officers to scale up their analytics capabilities by harnessing the knowledge, ensuring consistency and carefully selecting use cases for wider deployment and investment, based on the RoI.
What is your advice for successful leaders in the modern tech-focused world?
Marc: If we look at this from a ‘what lies beyond the horizon’ perspective, my advice is to get your feet wet - look into potential trends and then take well-informed, but still risky decisions. People nowadays are myopic when it comes to considering competition and future client needs and often get stuck in their current views. Being open to change and innovation and having a portfolio of new initiatives to play with is a critical element of strategy in today’s tech-focused world.
Ashutosh: Nowadays, it can be very difficult to stay on top of and respond to the changing technology trends, while running the business. So while it’s important to have a good technology strategy, it is also very important to communicate that strategy to your clients and throughout your organisation, so everyone shares the same goals and feels they can contribute to its success.
Ravi: The two things that I’d like to add are to firstly, be comfortable with uncertainty – we live in a very dynamic world and things change all the time. Leaders need to be flexible and always prepared for change.
Secondly, nowadays, it’s very easy to get so fascinated by the technology aspect; so my piece of advice is to not forget about the basics when it comes to leadership. i.e., technology and analytics are enablers to serve the broader business goals, and not the other way around.
Read more about mind+machine at: http://blog.evalueserve.com/
