Will robo advice spark a price war? We crunched the numbers looking at how much platforms charge compared to a typical multi asset fund.
This story originally appeared on Robo Advice News, a new AltFi site dedicated to covering the growing digital wealth management sector.
The days of complicated fee structures on investments could be over. Robo advisors and investment managers have been decreasing their fee structures in a bid to win new customers.
Competition in the investment sector is heating up and the regulator - the FCA - is increasing pressure on asset managers over fees.
Vanguard, a U.S. based passive fund manager, is planning to sell its index funds directly to UK consumers, charging just 0.23 per cent annually. Previously, individuals had to invest in funds through an intermediary or, more recently, via robo advisor to get access to the company's funds.
Robo advice platforms, or investment platforms that use automated technology to invest in various index funds, are at a crossroads. Revenue is low and there are many players; about 200 in the U.S. and 20 in the UK.
The endgame for robo advisors isn’t profitability, it’s survival, said William Trout, a senior wealth manager analyst at research firm Celent.
“They are following an Amazon.com strategy (think to the early 2000s) of starving their competitors of oxygen until they dominate the space, whereupon they can add services and/or increase pricing with relative impunity,” he said.
Still, while there is growing competition between traditional wealth management funds and robo advisors, the younger start ups have the advantage of fee transparency.
“That’s a signature feature of the robos. You can go online and see what they are charging in fees and the underlying ETF charges,” he said.
So how much would an investment today cost you in fees?
Taking a look at the top UK robo advice platforms, we found that an investment of £10,000 would cost an average of £6.79 a month in both management, platform, and fund fees.
Actual fees by platform vary, however, as well depending on the sum of money as some costs are fixed.
Wealthify, for example, offers fee reductions based on how many people you have in a “circle” who also invest through the company.
Even the platform with the highest fees was cheaper in comparison to the average fees of multi-asset funds as measures the fees from the Investment Association's mean average.
A £10,000 investment in 2015 held in the average fund in the IA's 20-60% Shares sector would have cost an average £9.83 per month for a mixed fund, while the average fund in the IA's 40-85% Shares sector would cost £10.25, according to data on the average ongoing charges figure from the Investment Association. However, these funds tend to charge annually.
Putting this all together, for the average robo advice platform a £10,000 portfolio amounts to approximately 0.81 per cent fees, or £81 over a year. In comparison, the average multi-asset fund charges between 1.18 per cent and 1.23 per cent over the course of the year, with IA's 40-85% Shares sector the higher of the two. This amounts to £118-£123 on £10,000, or approximately £40 more than the average robo advice portfolio.
The multi asset fund fees however do not include advice and service fees are unrelated to product fees, a spokesperson at the Investment Association said.
Of course, these average fees in 2015 were lower than what they would have been a few years ago due to the Retail Distribution Review. The rule, made effective in 2014, prohibits advisers from receiving commissions.
Pre-RDR fees would have cost £15.42 and £14.92 on a £10,000 investment.
Some independent financial advisors are also trying to look at other fee structures. Christian Evans, the founder of fund manager Sanktuary Investments in Cardiff, doesn’t charge a management fee. Instead, he charges a 30 per cent performance fee.
“I’ve seen clients demoralised by being charged constantly over a period, annual management fees with no performance at all,” he said. “So by offering performance, we think that we are trying to be on their side, so to speak.”
The fees are tiered, so the more you invest, the less the company charges, he said.
Moneyfarm, a robo advisor based in the UK and Italy, stands out because it doesn't charge a management fee for any investments under £10,000, just the fund fee. Investments over £10,000 are charged 0.6 per cent.
The platform decided to not charge any fees as a way to gain customers, said Giovanni Dapra, co-founder and CEO of Moneyfarm. He said it's been paying off. The firm has grown 200 per cent year to date in the UK.
While the company doesn't publish its assets under management, nearly 70 per cent of its customers have increased their investments, he said.
“They see that we are truly independent, and we actually do what we say,which is not super common to financial services, and they will trust us more and invest in us more," he said.
AltFi is returning to Amsterdam for its second annual Summit in the city. The inaugural event last year was a roaring success, with key figures from across Continental Europe's alternative finance and digital banking sectors highlighted. These included Jeroen Broekema, managing director of Funding Circle Netherlands, and Mieke van Engelen, head of innovative partnerships at ABN AMRO's standalone lending platform, New10.