Robo-advice, a great idea chasing the wrong market

The emergence of Robo-advice in the UK investment market is a hugely positive development, offering investors low-cost and convenience. But it is frequently seen as destined to be dominated by Millennials, a cohort far less suited to investing than their baby boomer parents. It is surely easier to convince this older generation to adopt investing via their smartphone than persuade digital native Millennials to start investing.

At the forefront of Robo-advice is Nutmeg, a UK Fintech firm frequently held up as a vision of what investing can – and most likely will – become for much of market. Their ‘robo-advice’ (no humans involved) offers investors a low-cost entry-point to the market with online access designed around the modern desire for apps. To create your portfolio, it relies on you selecting your goals, your attitude to risk and whether you would like active management.

They boast strong returns relative to the market and half of their customers are new to investing. Both the FT and Business Insider speculate that Nutmeg will capitalise as Millennials come to dominate funds under management. There is some sense in this: creating a cost-effective and convenient investment portfolio to match your goals will appeal to new investors. It can also come in the tax efficient wrapper of an ISA. But will it encourage Millennials to invest in enough numbers to dominate funds under management any time soon?

The number who invest in Stocks and Shares ISAs is in steady decline. Fifteen years ago, there were nearly as many Stocks and Shares ISA subscriptions as there were cash. Now cash outnumbers them 4 to 1. This is against a backdrop of historically low savings rates while the FTSE has enjoyed all-time highs and healthy dividend returns. Then there are the Millennials: many new digital services launched are proclaimed as the obvious choice for this cohort who are expected to embrace the value that so exclusively meets their needs and comfort with technology.

To grow (or even maintain) the market there is sense in targeting the young: accepting risk when you’re younger provides time to smooth the ups and downs of short-term stock market performance. But this means encouraging from a low base. Only 7% of the ISA subscriptions held by Millennials are in stocks and shares. There are many reasons why long-term investing will not appeal to Millennials: even those in their mid-30s will feel the long overhang of student debt and the challenge of joining and climbing the property ladder. For all the talk of Millennials flocking to robo-advice, the question is: Can the benefit of a low-cost, smooth app-based execution overcome the many reasons why stock market investing may not be right for them, irrespective of the packaging?

Which brings us back to the Baby Boomers. Stocks and shares ISAs and the highest value subscriptions are concentrated among the oldest investors. If we ignore the stereotypes, a far simpler goal would be to encourage adoption of Robo-advice services among older current or would-be investors. Baby Boomers are a large cohort, with accumulated wealth and longer life-expectancy than previous generations. There has been double digit annual growth in the number with a smartphone in each of the last five years among this group. Rather than competing with Millennials’ short-term prominent financial goals, should we not consider app-based Robo-advice as the product of the future for their parents?

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