The automation evolution
PEER-TO-PEER lending emerged as an alternative to mainstream banks, simultaneously widening access to credit and boosting retail investors’ returns.
Some would argue that P2P has made finance more accessible and shifted it from the ‘computer says no’ mentality of the banks. But is there room now for machines? Like P2P lending, robo-advice provides an alternative to the more expensive world of financial advice, offering lower minimum investments and less paperwork.
Robo-advice comes in a number of forms. First there are investment firms such as Nutmeg that will build an online portfolio of exchange-traded funds (ETFs) based on the goals and risk assessment of an investor.
There is little sign of P2P platforms making headway on robo-investment portfolio websites, but there are signs of life in other automated channels.
There is a robo-world of automated savings apps, such as Plum that uses an algorithm to identify consumers’ spending habits to calculate a small amount of money that will automatically be put aside every few days.
Plum uses a chatbot through the Facebook messenger service where users can move their money and track their spending. It also offers an option to invest with RateSetter.
“Robo-advice and the huge growth it is experiencing is symptomatic of a wider change in the way we communicate and engage with institutions previously only accessible over the phone or website,” Daniella Camilleri, communications lead at Plum, explains.
“The appeal of robo-advice comes from the intuitive and unobtrusive form it uses to communicate, allowing for users to manage their money with as little hassle as possible.
“We have thousands of users investing in our P2P option with more and more joining their ranks every day, demand is definitely there. People are curious and want to try things with an interface they feel comfortable with.”
P2P has always had a robo-style function, whether it be auto-lending that automatically spreads loans across a variety of borrowers, or the more recent aggregators such as Goji, InvestUp, BondMason and Orca that build and manage a portfolio of P2P loans across several platforms on behalf of an investor.
But a platform offering pure robo-advice geared solely towards P2P that builds individual risk-profiled portfolios still seems a world away.
“Conducting suitability on investors, then matching suitable investments to a score, is a difficult task, particularly if the scoring system is on the same scale as other asset classes,” Iain Niblock, chief executive and co-founder of Orca, explains.
“Current market players who conduct risk profiling of traditional investments such as Dynamic Planner, Defaqto or FinaMetrica would be best placed to risk profile P2P investments. This would help open up P2P to the financial adviser market and potentially allow innovative solutions such as robo-lenders to evolve.”
Although it is difficult, Niblock recognises there is still potential. “There is demand for products that allow people to build diversified portfolios of loans,” he adds.
“Investing in P2P is complex due to the large variance of assets available and the fact that investing occurs directly on platforms makes building a diversified portfolio painful.
“Automated portfolio solutions may make the asset class more accessible to a larger demographic of retail investors. The element of providing advice doesn’t necessarily have to form part of this solution to deliver value to users.”
“There are also P2P platforms who recognise the potential for robo-advice. “We certainly expect an increased demand for robo-advice going forward,” Stuart Law, chief executive of business P2P lender Assetz Capital, says.
“This is being driven by a retail market that wants bespoke products to help them meet their financial goals. A one-size-fits-all approach doesn’t cut it. P2P lending will need to become more fluid and flexible, and using robo-advisors to guide investors through this decision-making process makes perfect sense.”
“Property P2P lender Octopus Choice, which already works with human financial advisers, says it is the process of looking at working with the robo market.
“From an investment and financial advice point of view, P2P simply represents another asset class that can fit into an investment portfolio, whether that is through robo-advice or traditional financial advice, and that is what is exciting about it,” Sam Handfield-Jones, head of Octopus Choice, explains.
“Technology has allowed access to asset classes that were previously only available to high-net-worth or sophisticated investors.
“We work closely with financial advisers to illustrate how P2P can fit into a typical portfolio, how it could work from an asset allocation perspective and of course diversifying your ISA.
“We are also talking to robo-advice platforms around integrating our P2P product within their offerings. It’s not yet a mainstream part of an asset allocation discussion but we hope to try and change that.”
“There is no reason why P2P lenders couldn’t provide a robo option, according to Jamie Cooke, chief executive of compliance specialist FSCom.
“There is nothing to stop P2P lenders using robo-advisors to define a portfolio composition,” Cooke explains.
“I would also assume that any advice provided by P2P lenders will always be for retail customers because P2P is targeted at individuals and small businesses. Larger corporates, who would qualify as professional clients, would have less demand for alternative financing arrangements in my experience due to the availability of credit from banking providers.”
“Neil Faulkner, co-founder and director of P2P analysis firm 4th Way adds that the Financial Conduct Authority (FCA) may even be pleased to see another way of filling the advice gap.
“The FCA has acknowledged the investment advice gap for less-wealthy or non-wealthy individuals and it is supportive of P2P lending, so robo-advice will help address this issue,” he explains.
“But, as attractive as P2P robo-advice may be, there are some questions as to whether it would work as a standalone product as you cannot get a full financial plan from purely investing in P2P.
Handfield-Jones explains that platforms need separate permissions for P2P to other regulated advice so it would be hard to combine this with a wider financial plan.
“Ultimately you cannot give financial advice when only looking at the P2P component of someone’s total wealth,” he says. “You need to look at their stage of life, life goals, the cash they have, their pension, their cash and stock market holdings along with their personal tax position. Providing advice on a P2P portfolio is not going to provide good client outcomes as it won’t be looking at the whole picture.
“Simply advising on P2P without knowing the customer’s broader financial position would be very hard to get right.”
“He insists P2P is still appealing for investors, financial advisers and robo-platforms. Others are less effusive. Stephen Findlay, of BondMason, which offers a portfolio of alternative finance-focused loans across several platforms to investors, says there is already a robo element at the loan level for investors but questions how it would work across platforms.
“At the platform level, I think it’s a bit dangerous as the data is sparse and not homogenous – so I fail to see how you could meaningful create a robo-advice algorithm for this,” he argues.
“He also highlights that many of those already investing in the sector on behalf of investors, such as BondMason and investment trusts, have started moving away from pure P2P.
“Robo-advice also has its own limitations. Many providers have a set strategy such as only investing in passive funds, so would not be looking across the whole of the market in the same way an independent financial adviser would, as Daniel Rajkumar, chief executive of Rebuildingsociety, explains.
“Robo-advice has an important role to play. With many retail investors unwilling to pay for personalised advice, anything that helps deliver targeted information is a good thing,” Rajkumar says.
“Advisers who represent a company must declare to their prospects that they are only able to advise on their products. The same limitation is true of robo-advisers, which may support the sales process, but are unlikely to give a holistic, unbiased industry view.
“Developers of robo-advice solutions will be encouraged to optimise the robo for maximum profitability for the firm. So, the concern is that questions could be loaded to encourage customers to make investments which they might not ordinarily undertake.
“The link of algorithmic investing with robo-advice has the potential to be a recipe for success as well as disaster.”
He suggests this is where aggregators have a role to play, by using their holistic overview of the industry to provide better informed and less biased advice. The keyword, as with any asset class, seems to be choice for the investor.
“An investor could easily, with relatively little knowledge, self-select a basket of six to 12 low-cost passive share funds to invest in, which will see their money spread across hundreds of shares,” Faulkner adds.
“In P2P the situation is arguably even better, in that you can opt for auto-diversification at no extra cost. However, I think it is important to offer robo-advice and full advice to those who want it, so the options need to be on the table.”
“The human touch is still alive in P2P lending but there have been signs of a move towards auto-investment services, with some of the biggest brands such as Funding Circle now purely offering autobid functions.
However, auto-lending is different to robo-advice as there is less personalisation and risk assessment, which in a world where the consumer wants more control of their finances, may become more important. But this then raises the question of whether the public is expected to ditch the banking intermediary in favour of eventually letting the robots take over.