BETTER FINANCE continued its research series into Robo-advice with this seventh annual edition (2022), mapping a sample of platforms that provide online Robo-advisory investing services, by analysing their (automated) advice process in terms of transparency, costs, portfolio composition, suitability and sustainability options and preferences for the client. This edition’s analysis focuses on Robo-advisors’ ability to deliver independent, bias-free advice and break the quasi-monopoly of the inducement-based (‘non-independent’) distribution model in most EU countries.
The report covers a sample of 16 platforms in 10 countries across Europe, Australia, the USA and Singapore.
Our mystery shopping exercise once again yielded interesting results:
• Fees: The success of the Robo-advice concept hinges on its ability to keep costs low. In this respect, platforms do not fall short as they continue to be far less expensive than the equivalent services provided by more traditional players such as banks, traditional financial advisors and insurers. Robo-advisors maintained their competitiveness over the years with some platforms even lowering their fees in 2022.
• Asset allocation: algorithms continue to generate concerning divergences in expected returns, asset allocation and associated risk between platforms for the same investor profile. However, this issue is not specific to this category of retail distributor. Traditional ones also have divergent stock allocations by profile and often use algorithms.
In instances, a balanced risk-reward profile composed of about 50% equities, is expected to yield almost as much as a portfolio with 0% of its capital invested in equities.3 In other cases, we observed slight improvements in terms of featured equity/risk/expected returns adequacy. However, the suitability of the offer (based on our generic profiling recommendation) of the equity portfolio has not improved across most platforms as we observe an overall stagnation over the years.
• Transparency: the combined score of a group of Robo-advisors per category (Fees, Portfolio, Risk and Past Performance) from 2018 to 2022 reveals that online advisors are not improving their scores. Although transparency of information (disclosure) on fees was fairly clear in 2022, transparency with regard to past performance continues to be the worst-performing indicator. As regard the advice recommended (under MiFID II rules), 10 out of 11 EU-based Robo- advisor disclose their independence.
• Conflicts of interests: according to the information disclosed on Robo-advisors’ websites in scope, their business models do not rely on “inducements”. However, one platform alluded to a possibility of selecting such products but assured that any compensation would be fully passed on to the customer, whereas another one does not disclose any information on independence nor inducements.
Overall, Robo-advisors are for the most part considered “fee-only”. In this sense, most Robo-advisors are usually deemed to deliver independent investment advice, thereby eliminating issues of bias and “conflict of interest” in the retail distribution chain.
• Suitability: This report also re-assesses the suitability of the questionnaires used by the different Robo-advisors. A recurring concern is that individual investors are often asked very few questions about their personal situation due to the streamlining of processes.
The research also investigated the suitability of the investment recommendations. In terms of performance, most investments recommended are in low-cost diversified index funds, yielding better returns over time than the average “active” retail funds advised by traditional, non-independent advisors. In terms of diversification, all platforms propose fairly diversified portfolios according to our methodology (see Annex I - methodology).
• Sustainability: The sustainability preferences for potential clients are now a legal component of the suitability assessment. In 2022, it appears that all EU platforms indeed attempt to determine the suitability preferences of their clients, but to a limited extent. Most often, they recommend that clients retake the questionnaire in order to comply with their (limited) sustainable portfolio offer, if any.
Whilst 12 out of 16 Robo Advisors provide investment options labelled as ‘sustainable’, 2 Robo-advisors allow for comprehensive information and questioning, offering a choice between a range of thematic options to be selected.
Interestingly, the 3 non-EU platforms' sustainability integration, however limited, matches 5 of European Robo Advisors' level of sustainability performance, where one non-EU platform even outperforms the 5 European counterparts under scope.
Finally, reflecting on previous year's findings, none of the Robo- advisors provide more specific details on the sustainable investment strategy and the approach taken (such as integration, exclusion, engagement, or impact). The assessment of suitability and sustainability seems to be a perfunctory "tick-the-box" exercise, most likely leading to a discrepancy with clients’ expectations.