AT Kearney’s Bob Hedges: The inevitable tide of digital functionality


The much-heralded attack of the robo-adviser is driving a multi-channel approch in the US, and putting the squeeze on adviser margins. AT Kearney partner Bob Hedges sees the UK following suit. John Greenwood reports

Advisers are familiar with dire warnings of the threat robots pose to their existence. Extrapolations of early US evidence of take-up of digital advice solutions, transposed to the materially different UK market, have often painted a picture of a future where traditional advisers are increasingly marginalised. Yet many advisers today find demand for their financial advice has never seemed greater.

For Bob Hedges, partner at global strategy and management consulting firm AT Kearney, robo is not only gaining traction, but the pace of adoption is increasing too.

Based in Boston, in the US, Hedges’ team has been tracking the adoption of digital advice and distribution solutions for some time now. A year ago its report, Hype vs Reality – the Coming Waves of Robo Adoption, predicted digital advice would go from marginal pursuit to mainstream channel within five years. In this year’s Why Investing Will Never Be the Same report, Hedges and his team describe how the pace of adoption is turning out to be quicker even than expected.

“We are seeing an acceleration in consumer interest in robo propositions – a doubling of what we had expected when we first did our work a year ago,” says Hedges, whose firm’s research paper, published 12 months ago, predicted that by 2020 robo-advisers would manage around $2.2 trillion (£1.5 trillion) of assets in the US.

“More and more people are comfortable dealing with things that we had thought were obstacles to them. Even wealthy middle-aged people are increasingly digitally competent,” says Hedges.

The UK and US are radically different markets – the US already has a considerably higher take-up of self-directed investors, around 30 per cent of mass affluent people, and its regulatory standard for advice is lower than the UK’s, making delivery less complex. But Hedges believes the UK market is well on its way to broader take-up of robo, and is perhaps where the US was two or three years ago.

“The UK is probably 18 to 24 months behind where the US is at the moment. The big providers are still in denial. In the US back in 2013 there were only one or two firms in the market. Today there are eight robo firms active and of the top six broker operations, half of them have some sort of robo offering. The whole process has taken three to four years,” he says.

The US market has seen the likes of Bank of America/Merrill Lynch, UBS, Wells Fargo, TD, Fidelity, JP Morgan and Capital One all launch or partner with tech operators with a view to launch. It is this herd approach that Hedges expects to be replicated in the UK in the not-too-distant future.

“In the UK you have Nutmeg and LV=, but a year from now I expect to see multiple entrants,” he says. “Where the UK differs from the US experience is in the adoption of a UBS. The big US houses are now open about the fact that they are going to do something. A year ago these firms would have said there is no firm interest in pursuing this model and that advisers are the way forward. But now there is momentum in the marketplace.”

Hedges agrees there are clearly a number of differences between the UK and the US markets, but argues these are not, of themselves, likely to stem what he sees as a powerful trend.

“The UK has a smaller self-directed market, and until recently the influence of fin tech players was smaller. Furthermore, historically the UK consumer has demonstrated in a lot of market research that they don’t do as much switching as people in the US. This is true in the credit card market, for current accounts, mortgages and elsewhere. This is why the regulators have been pushing for greater competition and product comparison by consumers,” he says.

“But this is part of a global trend, how technology is allowing a reduction in the cost to the consumer. The US market is big so start-ups can get a foothold. Australia is small so we have had government pushing change. The UK is somewhere in between, but we have still had market entrants such as challenger banks like Metrobank,” he says.

In the US, Hedges sees the growth in robo coming from two directions – those self-directed investors who have been doing everything themselves, and from those who were previously getting a full-service proposition.

“The surprising thing we are seeing is the extent to which self-directed consumers are prepared to move. Thirty per cent of mass affluent people in the US, using the likes of Charles Schwab or Fidelity, say ‘if the price comes down to 25 basis points to manage my investments, I will pay someone else to do that for me. My time is worth more to me’. So this segment is moving from self-directed to robo platforms,” he says.

Robo and, more broadly, digital functionality is also pushing adoption from the other side of the market – with consumers either seeing it as a cheaper way to access advice, or simply expecting technology to be there in the way it is in so many other ways in their lives.

“Increasingly, consumers are expecting digital functionality from their full-service advisers,” he says.

Hedges points to UBS’s deal with San Francisco wealth management tech firm SigFig to create technology for its 7,000 advisers as an example of this latter trend.

“The UBS SigFig partnership is about needing to engage traditional UBS customers with digital. They would not remain competitive, even with strong adviser sales channels, if they did not allow the client to connect with them digitally.”

While the Retail Distribution Review has forced UK advisers to become more competitive, this could prove as nothing compared to what may come if the US experience is anything to go by. At present, US consumers are largely unaware of how much they pay for advice, even though there are rules around disclosure. This, says Hedges, is a chance for big players to use advertising to persuade consumers to shift for price.

“We expect a couple of the big providers to encourage comparison price shopping on advice. That will educate consumers to shop around, rising awareness will put pressure on more expensive models, and people will move. We will see media advertising that asks: ‘Do you know how much you are paying for your investment advice?’ We already see it in mortgages, credit cards and home equity loans. The investing industry thought they were immune to this challenge. It happened with mutual funds and it is going to happen with advice itself,” he predicts.

So what about all of the softer issues, that only a walking, talking, real human being can address, reflecting on big picture life issues and having an engaged, nuanced, psychologically informed conversation?

“This is exactly the sort of thing that the heads of advice at big US players have been saying. And it is true that in future the reason advisers will be valued is because they will be working with clients, managing intergenerational wills and helping clients set up at a good retirement plan. But they will not be involved in the investment advice issues. Traditional advice firms will have to invest in these personal skills. That is where the value is, not in investments,” he says.

But therein also lies the big question for the entire sector – will people be prepared to pay what is needed for that conversation to be able to take place?

“Today there is a cross subsidy from the management fee of the assets that allows for this,” says Hedges.

“Will people be prepared to pay for the advice they need? That is the drama that will play out over the next decade.”

In Focus: Robo through the workplace

How will robo develop through the workplace?
“The workplace should be fruitful ground for robo advice,” says Hedges.

“If you go back more than a decade, the original robo companies – Financial Engines and Guided Choice – were offered through the workplace through 401K plans.

“In the US, we have workplace banking as an employee benefit. When you become an employee they offer you a great banking programme and special deals if you get your pay deposited into the current account. A logical extension of this is to offer a robo investment offering as an add-on.”

What about demand for aggregation services, such as Aon’s Big Blue Touch?

“In the US, consumers are inherently suspicious of employers and of the data they share with anyone. That is why direct deposit is only 60 per cent of payroll: 40 per cent of people do not want their pay traceable to the bank.

“So in the US, people are less likely to want to share their information. That may hold such services back over here. But the UK may be different.

“However, in the US, we have had successful screen-scraping services, such as Mint, which started out that way. These services have been a success, but they were independent companies that were sold through banks, not through the employer.

“Whether the UK is culturally different in that regard remains to be seen.”