EXCLUSIVE: Robo-Advisors Let Down By Compliance Flaws - Report

Robbie Lawther, Assistant Editor, 18 October 2018


A study - made exclusively available to this publication - runs the rule over a robo-advisors around the world and despite some high performers, it finds shortcomings in this developing sector.

Robo-advisors are becoming increasingly user-friendly with more sophisticated features, a new report says, but it goes on to warn that the industry doesn't strictly uphold fiduciary standards and recommended portfolios aren't always suitable.

The MyPrivateBanking report Behind the Login of Leading Robo-Advisors 2018 - Benchmarking client experiences, portfolio recommendations and fiduciary standards, analysed and ranked 20 robo-advisors worldwide. The study had a particular focus on fiduciary responsibility and client suitability. It analysed the strengths and weaknesses of each robo-advisor according to 40 criteria under the following themes: onboarding content, technical features, portfolio features, fiduciary standards, client suitability, and best practices.

The top performer in MyPrivateBanking’s benchmarking is the German robo-advisor Vaamo (70 per cent of possible points scored).  Tied for second place with 64.7 per cent of possible points scored were Switzerland’s True Wealth and US bank Merrill Edge. 

Despite being the strongest performers, MyPrivateBanking suggested that the robos did not achieve higher than three-quarters of the available points because they have considerable scope for improvement.

These online-powered wealth management services, which take data about clients' risk and investment goals and then arrive at asset allocation settings, have risen as a distinct sector in recent years, seen as offering a relatively cost-efficient alternative to traditional advisory channels. New regulations that created "advice gaps" prompted technology solutions, although such platforms are also being pitched at high net worth individuals as well as those in the mass-affluent and retail categories. Studies often still show that clients using robo-advisors still like some element of human contact, hence the interest in hybrid models.

The report said that onboarding processes are a significant fiduciary pitfall identified in MyPrivateBanking’s assessment along with several other key weaknesses:

-- Robo-advisors are doing a poor job of getting to know their prospective investors. Only 19 per cent of available points in the demographic criteria section were awarded on average. Key information such as gender, marital and employment status, and the number of dependents was often ignored during the onboarding process;
-- Risk capacity is often overlooked during the risk assessment process. On average, only 41 per cent of the total points available for this category were achieved in our evaluation. Three robo-advisors did not include a single risk capacity question in their onboarding questionnaire; and

-- Robo-advisors do a sub-optimal job of recommending portfolios to conservative investors. The industry is attracting an increasingly diverse clientele, including Baby Boomers and retirees. Yet, its risk assessment processes tend to result in less suitable portfolios for those conservative investors. 

The research firm recommended a number of moves:

-- Design strategic and purposeful onboarding questionnaires. Robo-advisors should eschew two-step onboarding procedures and instead maximise the amount of information collected on prospective clients’ personal and financial background prior to generating a recommended portfolio; 
-- Give more weight to cash as an asset. Only half of the recommended portfolios included a cash allocation despite the fact that cash is a significant asset class; 

-- A more thorough approach to risk capacity. Robo-advisors should pay greater attention to prospective clients’ risk capacity. The onboarding questionnaire should ascertain the value of their assets (liquid and illiquid separately) and savings, their expected income stability, and their annual or monthly net income; and

-- Provide detailed suitability reports should be included with a recommended portfolio. Once a portfolio recommendation has been generated, it should be accompanied by an explanation of how it meets the client’s investment preferences and overall risk

“While robo-advisors and their investors are currently enjoying the benefits of one of the longest bull markets in history, their lax implementation of fiduciary standards could expose many of them to considerable risk once the market turns.” says Katrina Pirner, senior analyst at MyPrivateBanking. “As such, robo-advisors need to make an extra effort to guarantee its prospective investors understand the benefits as well as the risks of a recommended portfolio allocation. Our research shows that the robo-advisors market has yet to be definitively won. On average the benchmarked robo-advisors achieved only about half of the possible points, suggesting that while the industry may be maturing, it still has several notable weaknesses that need to be addressed. Thus, an opportunity still exists for traditional wealth management firms to develop products and services that compete with incumbent robo-advisors.”

Analysed robo-advisors:
Americas: BMO SmartFolio, Fidelity Go, Merrill Edge, Schwab Intelligent Portfolios, Sigfig, TD Ameritrade Essential Portfolios, Wealthfront.

Europe: Cominvest, Ginmon, Investec Click & Invest, Liquid, Nutmeg, Quirion, Robin, Scalable Capital, True Wealth, Vaamo.

Asia-Pacific/Africa: Bizank, Smartly, Stockspot.

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