Trust in a Robo-Advisor World

Martin Ford’s “Rise of the Robots” is one of the most provocative books I’ve read in the past 12 months. As a “glass-half-full” VC investor, I don’t often enjoy pessimistic visions of the world, but Ford makes strong arguments about the prospect of a jobless future. He rejects Panglossian futuristic visions with well-researched insights into the next cycle of automation, driven by both specialised and general artificial intelligence, which he believes will affect huge swathes of the global economy.  A supporting signal we observed last week at YC’s famed Demo Day was the dozen or so robot startups, tackling everything from research lab work to industrial inspections, with the promise of cheaper costs.

Ford makes a strong case that middle class purchasing power will continue on its downward trend, driven by widespread automation in people-intensive industries, squeezing rewards to workers at all skill levels, from airline pilots to lawyers, hedge fund traders and writers. (Even he might be out of a job in 20 years.)

The argument resonates because at Mosaic we’re already starting to see the next wave of startups that aim to sweep humans out of financial services. But I believe that the winners at this stage in the robots’ rise need more than machine learning and AI powered software - they need a human personality at their heart as well.

Historically an industry with complex products, where a myriad of regulation is unfortunately required to protect consumers from exploitation and “mis-selling”, financial services has been dominated by skilled intermediaries, the brokers and advisors who understand the arcane wizardry of stocks, bonds, mortgages and life insurance.

You can’t just walk into a bank or brokerage and buy a product off-the-shelf as you can in retail stores. However, much to the old wizards’ chagrin, software can actually provide far more sophisticated advice at the press of a button. Vanguard, for example, has enjoyed enormous success as the pioneer of low cost investment index-tracker products for the masses. Now the first generation of “robo-advisors” has sprung-up in the wealth management area - they are growing fast by offering an easy, simplified, automated portfolio management product, at very low cost (eg 20-40 basis points a year) compared to an investment adviser at Morgan Stanley, Citigroup or Deutsche Bank. Robo-advisors are now appearing in other spaces of fintech including pensions and retirement accounts’, insurance, and mortgages.

There is still a need for trusted counsel. Making important, non-advised decisions about pensions or mortgages would be unwise for the average consumer. For instance, recent research cited by the UK regulator, the FCA, found that one in five UK consumers cannot read a bank statement and that one in three cannot figure out what the interest on their savings should be. The FCA is deeply concerned about the “advice-gap” - more than 85% of consumers are not willing to pay more than $300 for online advice and are making important financial decisions about their pensions without consulting an expert. Given the costs, “full-fat human advice is becoming a game for the more affluent,” according to Mike Rogers, chief executive of Liverpool Victoria, the large UK insurer.

Enter the startups with well-designed, trustworthy robo-advisor services.

The software robots can’t do everything, yet. For a high net worth customer with family trusts, complex inheritance tax planning, and a family business to sell at some point, paying 1% to a trusted advisor may still make sense. Advisers can also play a role in persuading you not to do things, such as giving in to the instinct to sell when markets are plunging.

Neuroscientist Daniel Kahneman taught us much about both loss aversion and the endowment effect. And human advisors can provide emotional support and the comfort that someone is watching over your portfolio. McKinsey believes the future of wealth management involves a combination of human and robo-powered service, via a centralized call-center of advisors using phone, video chat and email, with all transactions completed digitally and seamlessly. Personal Capital is the closest manifestation of this approach, with fees at 3x the pure robo-advisors, although Vanguard has now offered a product at a third of that cost.

The question we’ve been asking ourselves at Mosaic is will we ever fully trust a robo-advisor. How do you combine the ease and simplicity of algorithmically powerful, intuitive and well-designed software with the transparency and honesty that consumers expect from a trusted human advisor?

To build a trusted relationship with customers we believe a robo-advisor service must be jargon-free, straightforward and treat customer data and privacy with the utmost respect. And customers must be able to talk to a friendly human being, if required, with one-click by phone to discuss any issue from the front screen of their app or home page of a website. No endless phone-tree, no long hold times, and a human that knows the answers to their questions (even if they are using software to get to the right answer).

We think the future is bright for robo-advisers with a human-personality and trust at the centre of their proposition. Software will outperform humans in providing financial advice in the vast majority of situations and at the lowest cost. As John Gapper pointed out in the FT last week, most ordinary investors would be better off if robots could not only handle their asset allocation but confiscate their savings and refuse to hand them back until the investments matured. And this applies even more for decisions in complex areas like insurance and mortgages (more to come on these subjects shortly). If you are working on a big idea in this area, we would love to hear from you.