What Could Possibly Go Wrong with Digital Wealth Managers? Plenty!


Picture Credit: Getty Images

Wealth Manager reported today that Swiss banking conglomerate Union Bank of Switzerland (UBS) with $2T in private wealth assets is launching a “digital wealth manager.” And they are not the first as technology is changing the way financial services are being delivered. Clients open their account entirely online, with no need for human interaction or “know your customer” paperwork, and then clients are offered access to five investment strategies through a range of active and passive funds created and managed by UBS. Initially rolled out in the UK, the management claims to Business Insider that the UK’s favorable regulatory environment allows this product to be launched in the UK. First, here’s UBS’s push for the SmartWealth Platform.

The new platform, which has been developed over the last 12 months, uses proprietary technology. It will be made available to a group of customers in the UK from November this year, with a full UK roll-out taking place in early 2017.  ‘UBS SmartWealth is a strategically important move for UBS. It enables us to bring our advice and expertise to a much wider audience, at first in the UK, but in time in other geographies too,’ UBS Wealth chief operating officer Dirk Klee said. ‘This launch is an example of how we can blend the best of UBS with the best of start-up thinking and agility, meaning clients can access new innovations alongside the insight of worldwide investment and wealth planning experts.’

UBS claims that they are embracing “start up thinking” but the small accounts are being lumped in with risk capital technology platforms. Crowdfunding platforms like Crowdcube, Kickstarter and Indiegogo use social media to raise funds for various projects. While the UK’s Crowdcube operates on the “all or nothing” model so that when a pitch reaches its investment target, the business receives the funding raised; if it does not, no funds are taken from investors. A commission is charged on successful funding campaigns. The Crowdcube platform effectively uses social media to intice potential investors about an offering. In March 2015, the Financial Conduct Authority released new guidance on the use of social media to promote financial products to ensure that all communications are clear, fair and not misleading- of course, this raises an issue of enforcement. So the U.K model removes the requirement of investor “sophistication” which comes from an investor being accredited and having the net worth to put into risky investments. The U.S. firms operate as “public benefit corporations” which Wikipedia describes as “a specific type of corporation that allow for public benefit to be a charter purpose in addition to the traditional corporate goal of maximizing profit for shareholders” (like a crown corporation or other monopoly over a public service).

Investment services platforms have been introduced by companies like Nutmeg, Wealthify, and MoneyFarm which generally employ exchange-traded funds (17 to 25 basis points) on top of the robo advisor fees of .95% to 1.45%. The services allows customers to invest online, including through Isas and Sipps in the UK, after asking questions about their goals and attitude to risk and the money is allocated. The UK Telegraph points out that “robo-advisors” have collected over $10B in US assets during 2015 and the UK banks are simply responding to the low end market niche.


Picture Credit: FTA Advisors, Amazon News

Britain’s banks, which have most pulled out of investment advice in recent years after mis-selling scandals, are looking at whether they can use “roboadvisers” to offer new services to clients. Meanwhile, the Telegraph disclosed in December that Duncan Cameron, the entrepreneur who co-founded Moneysupermarket.com, plans to launch a new roboadviser.  Evestor, which is being co-founded with Anthony Morrow, who set up financial advisory business Paradigm, will charge 0.44pc on customers’ investments, significantly undercutting Nutmeg, which launched in 2012. So-called “roboadvice”, where investors complete online risk assessment tests and have portfolios designed and managed by algorithms, have exploded in popularity in the US, with start-ups such as Betterment and Wealthfront leading the charge with low-cost services which threaten the established wealth managers. Charles Schwab, one of the largest brokerages in the US, responded by launching its own service, Schwab Intelligent Portfolios, in March.

Bloomberg correctly identifies the UBS entry as a “downmarket” move as the account threshold is L 15K versus EU 2M for Swiss wealth management accounts. Clients will be charged 1.7% of assets for an actively managed investment strategy and 1% of a passive one, according to Bloomberg. The fees fall as the amount invested rises but the active management fee is roughly 5X what pension funds pay for a cloned actively managed portfolio at Fidelity Investments, for example, and twice what Paradigm in the UK charges in pursuit of first-time punters. In May 2016, consultant A.T. Kearney predicted the robo-advisor market will reach $2T by 2020 but what if these systems are all hacked???

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