Robo-advisers have been a major point of discussion in recent years. However, Embark Group CEO Phil Smith believes we’re not even out of the “stone age” of them yet.
“There is no such thing as a true robo-adviser in the United Kingdom that is the honest truth,” Phil Smith stated. This is quite the statement bearing in mind a number of companies in the UK do claim to offer “robo-adviser” services. But, Smith believes current players in the market are offering guided investments and not true robo-advice.
To be classified as a true robo-adviser, a solution needs to boast tax optimisation, probability-based modelling of outcomes in ‘life events’, modelling of income profiles, behavioural risk profiling for suitability, and balancing of risk between investment and holding instruments in cash/liquidity, Smith said. All of these need to be combined into a single quantum tool. Without this, the tool does not provide the same service a consumer would receive from an investment manager. “Most of the market players, many of our clients included, are not yet robo-advisers, they are offering a guided solution, matching risk profiles to risk-based investments.”
This is not to say that companies eventually become robo-advisers. All of the components for a true robo-adviser exist in some shape and form in the market at the moment. There are solutions which offer tax optimisation, while another provider is enabling automated transfers and other companies are deploying cashflow forecasting. A business needs to be bold, take the gamble, and build a solution that encompasses everything.
A major reason why companies are yet to take the risk is purely because they have not had the cash to do so. This forces them to pick what they think is the biggest market. Most of those in the UK have picked ISAs, which is good for client numbers, but not for AUM, Smith stated. Another reason real robo-advice still eludes the market, is companies focusing on trying to make money from investments, rather than upgrading user experiences, leaving rather limited investment solutions. Finally, companies have lacked the expertise to combine investment, tax and liquidity into a single solution.
“People have set up some great businesses from nothing and they are fantastic. But, the sector is in the Stone Age and it’s got to get through that,” he said. “We are on Robo 1.0, right now and we have got to get to Robo 5.0 before we see what I’m talking about.”
Currently, we are at Robo 1.0, which is a single investor and risk profile which is attached to a model portfolio, according to Smith. This type of service simply assesses the risk appetite of the investor, which is not very sophisticated. The first development from this, Robo 2.0, will use a broader range of risk analytics through behavioural modelling. This development is already occurring, with companies already coming to market with full-suite modelling and changing how risk is measured.
Smith believes that tax is more important than investment return to UK consumers and this will be a driver for Robo 3.0, which will bring in tax functionality and optimisation. Robo 4.0 will bring together what Smith classifies as the “ancillary capabilities.” He went on to explain that this would be how a platform which helps users switch between different components to get optimisation of tax and investment, whilst maintaining liquidity. It would also help getting cash buybacks using a pension scheme and connecting pension drawdown to pay through services like Apple Pay.
Finally, Robo 5.0 will be the halfway house between investment firms and banks. In this service, cash management will become central to the proposition to enable the user to operate the outcome of the tax and suitability. We are not far from the robo-advisers Smith envisages, with him expecting to see solutions reaching Robo 5.0 in around three to five years.
Whether the UK is yet to see a real robo-adviser, there have been a large number of digital investing platforms in the market trying to get consumers attention. However, the usage of these apps is still rather low. A recent study from challenger bank Leumi found that around 72% of consumers in the UK do not invest into stocks and shares, or an investment fund. Furthermore, 18% even stated they did not know how*.
“Financial education in the UK has been shocking for decades,” Smith said. “I would even go to the point to say it’s a national embarrassment. Confidence, knowledge and understanding of all things money is uniquely low in the UK and that that creates a real hurdle of engagement for people.” There is a clear problem in the UK with personal finance education. The report from Leumi stated that 90% of UK consumers felt they were uneducated about personal finance, with 47% of them looking to banks to teach them. To change this, investors need to implement more user-friendly services, like those offered by Embark.
“Everybody thought I was a raving nutter!”
Embark Platform, which is owned by Embark Group, was established in 2012/13 by Phil Smith, and his small team. The decision to create the platform came to Smith during a year-long sabbatical he had taken after a long career which spanned wealth management, asset management, brokerage, insurance and management consulting in the UK and Hong Kong. While taking this time out to rest and be around his daughter while she undertook her GCSEs, Smith became “hooked with the idea of doing something entrepreneurial” before he “ran out of road in terms of career longevity.”
He became interested in the developments coming from the Retail Distribution Review (RDR) in the UK and how it could shake up financial services, particularly investment advice. RDR was launched by the Financial Conduct Authority to investigate how investment products were distributed to retail customers. After doing some research, he saw an opportunity. “It’s a little bit high-risk and a little bit interesting, but if someone steps into this place and gets it right, they’re going to build a really interesting business really quickly,” he thought.
The Embark Platform builds retirement-focused long-term savings services for wealth management, banking and robo-adviser providers. Its services can support personal pension, stocks and shares ISA, general investment account and third-party investment account tax wrappers. Its technology boasts straight-through processing (STP) and high levels of automation to ensure streamline customer experiences.
As with any new business, Embark faced two key challenges when it was entering the market. The first was to ensure it was rich with consumer technology and intuitive straight-through processing. Smith stated that it was key for consumer technology to be in the DNA of the business if it was to succeed in the long run. The next problem to overcome was a little more fun to figure out. He said, “How do you get the right balance between being a unicorn where you’ve got something that people will think is brilliant, but never use? To being something which is dead boring, but everybody needs to use?” The company overcame these by starting off with paper-based businesses it acquired to get to the scale and give it the financial bandwidth to push out on technology.
It’s tough for all companies to scale and gain distribution, with many companies which had great ideas crumbling because they could not get their foot in the market. Smith said, “for any start-up or pseudo start-up, you need resilience bordering on the belligerent to carry on going and sell your wares, stay true to strategy and build the things you think people are going to buy.” Embark did this, but with a slightly unique route to market.
“Everybody thought I was a raving nutter and I probably was in all fairness,” Smith said. “I didn’t go and build some shiny tech and bring a new idea in emerging form to the market. Instead, I went and bought a very broken paper-based business and said I’m going to turn this into the shiniest STP machine you’ve ever seen.” Embark Platform was able to make its break in the market once it got its first client Nutmeg, a UK-based online investment platform, with the aim of building it an STP pension service.
Smith approached the potential client and said, ”Look guys give us a shot. I don’t have a platform yet, I don’t have the expertise and I can’t show you any proof points, but take a bet and we will build you the UK’s first 100% STP pension.” Embark achieved what it claimed so boldly to do and Nutmeg is still one of its largest clients today.
*Banks’ role in Modern Society Report, Pepper/Leumi, January 2020.
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