The BID

How to build a robo-advisor

Esta semana com Adam French, CEO da Scalable Capital

Após a crise financeira, havia a expectativa de que robôs consultores, ou seja, plataformas digitais que gerenciam dinheiro, dominariam os investimentos. Anos depois, isso não aconteceu. Porém, com centenas de bilhões de dólares em gestão, os robôs consultores tiveram sucesso em acelerar a adoção de investimentos para geração millenial.

Então… como você pode construir um robô consultor? Neste episódio de The BID, Adam French, CEO da Scalable Capital, fala sobre o seu processo para fazer exatamente isso. Adam discute os desafios que enfrentou ao construir a Scalable Capital a partir do zero e como robôs consultores podem ajudar a elevar a transparência e a confiança no processo de investimento.

Todos os episódios são gravados em inglés

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  • Mary-Catherine Lader: In the wake of the financial crisis, a number of entrepreneurs and some bigger companies decided that they would try to use algorithms to manage our money. When these products, which are now called robo-advisors, first launched, the expectation was that they would soon take over all of investing, and that all of us would have our money managed by algorithms soon enough.

    That hasn't happened. Now in 2019, there are hundreds of billions of dollars around the world, particularly in the U.S. and Western Europe, managed by robo-advisors. But demand has been slower than expected.

    But they have driven adoption of investing among millennials, many of whom might be sitting in cash if they didn't have such a simple way to invest their money. At a high level, robo-advisors digitize the process of investing. They give you transparency into how your investments are performing, and basically make the decisions for you. But of course, there's more to it than that. So how do you build a robo-advisor, and what's underneath the hood?

    On this episode of The Bid, Adam French, a founder of Scalable Capital, joins us to answer those questions. Scalable is Europe's fastest-growing digital wealth manager. Adams talks to us about the challenges he faced in building Scalable Capital from the ground up, how he's sought to increase transparency and trust in the investment process, and why he thinks we're all really just living in a virtual reality world. I'm your host, Mary-Catherine Lader. We hope you enjoy.

    Adam, thank you so much for joining us today.

    Adam French: Thank you. It's great to be here.

    Mary-Catherine Lader: So you're the CEO of Scalable Capital in the UK. It's Europe's fastest-growing digital wealth manager. Can you quickly tell us about what Scalable Capital is and how a digital wealth manger is different from a traditional wealth manager?

    Adam French: So we would call ourselves a digital wealth manager, and by that we really think about it as how you would build a wealth management firm today. It's about being where your clients actually exist in an online world. We want to be in the apps, we want to be on their social networks, and so it's about how you build a wealth manager as if you have no legacy whatsoever. And that's not just the apps, but it's the processes as well. So we're talking about automating investment management, automating the client reporting, and ultimately engaging with clients in an ongoing way, which is way more convenient than it would be if they had to deal with a traditional financial advisor who would have to meet them face-to-face maybe once a quarter. We can make sure that we're getting information to our clients in a contextual way, in a timely way, in a relevant way. And because a lot of it is automated, we can lower the cost of the provision of the service as well, which means that you've got something which is very convenient and also lower-cost than what clients would have access to through traditional means. But there is also another huge difference, which is that our service is way more accessible. Traditional financial services, traditional financial advice was only available to a tiny sliver of people, what we would believe to be the top one percent. And now we're delivering financial advice and investment portfolios for the masses, which is something that the traditional world had not been able to offer. And that's an area that we think really differentiates the world of digital wealth management.

    Mary-Catherine Lader: So all of that makes a lot of sense, but not everyone has decided to start a digital wealth manager. So what were you doing when you decided to start Scalable Capital and why did you decide to start it?

    Adam French: So I've got a background in traditional financial services and it was there, along with my cofounders, that I think we all faced the same problem. And it was a problem that we had personally but also a problem that was brought to us from family and friends, which is the question around, what should I do with my money? And for some of us that was around not really having the right options available. I wanted something which was low cost, because I understood that if there are high costs to the investment process, then you're likely to reduce your investment returns. So for me, it was not being able to really find the right thing. But for others, it was around not even having access. We were also quite lucky as well because we worked in an area within our old professions where we were very much aware of how technology was impacting the institutional world of investing, and how it had made that way more automated, way more efficient, and ultimately, you could drive efficiencies through cost savings, et cetera. And yet, we hadn't seen that enter the world of wealth management. So it felt like we had as a team of co-founders, the right set of skills to be able to bring the technological angle to be able to try and build this firm from scratch, but then also understand the client challenge. And that is something that when we look back over the last five to six years when we started this journey, that wouldn't have been possible ten to fifteen years ago. Because of things like the cost of cloud computing coming down to ridiculously low levels so we can actually compute and personalize our client portfolios at scale, to the development of the ETF market which allows us to obviously invest our clients' funds into very low cost, diversified vehicles. And it really felt like the right time to go on such a journey was over the last five or six years when we decided to leave our jobs and give Scalable Capital the launch pad that it needed.

    Mary-Catherine Lader: So since you started this journey, six, seven years, ago, what's been hardest, contrary to your expectations, harder than you expected?

    Adam French: Other than normal pains of trying to grow a business from scratch, the hardest thing has been actually integrating into incumbent financial services firms. We made a few good decisions early on, which I think we've benefited from. For example, we decided very early on that we wanted to make it an international platform, so we provided it in the beginning to UK and German clients. And to do that, we had to find local providers to help us with custodial banking services, with payment provision, with trading, with brokerage. And finding those local partners that had the open technology that we needed to connect to was really, really hard. We're talking about months and months if not years ultimately of the initial work and then the ultimate refinement of those integrations with other providers. But now that we've done it, we've obviously got a platform which is really flexible, and this is where our whole flexibility came from when we're working with B2B partners. So we right now have about five implementations live of Scalable Capital-style businesses that we're working with, either financial institutions or corporate and obviously our own implementation with our own consumer brand. Looking back: fantastic decision. Going through that process: really painful. Because it made it such that we had to put in a lot more time and effort and obviously development costs before being able to actually get something live in the market and to learn and iterate and test with clients.

    Mary-Catherine Lader: Well that investment in making your platform scalable – lowercase S, no pun intended – to work with incumbents makes a ton of sense, because that's been so much of the challenge in the U.S. The promise of digital advice hasn't necessarily played out, in part because legacy technology platforms are really challenging, clients want different things, and the reality is that a lot of customers aren't really moving from their traditional bank. They may try a digital app, but they're not going to move all of their accounts. So with that in mind, what do you think we'll see in terms of customer behavior? Where will people be banking and investing in two years, five years, ten years? Only with Scalable, only with digital entrants like that, or with some traditional banks too?

    Adam French: So I think it's really hard to give you a definitive answer. But that's also been the Scalable strategy. We have a direct-to-consumer business where we currently have about 40,000 client relationships where we manage their money, we talk to them on the phone, they understand who we are and they're engaging with us as a brand. But we also power the investment services of the incumbent world and also more and more digital challengers who are coming to market who would also like to have a Scalable solution as part of their, let's call it, digital banker. So right now, we're not sure who is going to win that. If anything, maybe actually there is space in the market for all of us, but what we're very aware of is the fact that with our own brand out there, we get to talk to clients every day, we get to learn from them, and we get to develop our platform in line with their needs and their wants and desires. And we categorize them quite broadly as smart professionals, who really are digitally native and trust new firms to be doing financial-related stuff online and there are no real other attributes that we see. It's not an age thing.

    Mary-Catherine Lader: What is the average age?

    Adam French: The average age is just in the mid-40s. It's not a millennial thing.

    Mary-Catherine Lader: Right.

    Adam French: A lot of people assume that the online investing world is something for young people, first time investors; that's not actually the case. But it's definitely such that we have more 35-year-olds than we have 55-year-olds. So there is a slant towards people that are younger, but it's more to do with digital savviness more than anything else.

    Mary-Catherine Lader: And how much of that was deliberate versus what you noticed transpired in who actually was getting traction with your platform?

    Adam French: So we were lucky that we weren't the first; it meant that we could learn from the mistakes of others. One mistake that we felt was being made by the initial cohort of companies coming into the market was that they were providing a service for the broad mass market. And that's a really hard market to conquer. So we made sure that when we launched the platform, that our whole identity was focused on a group of customers that had a higher level of financial savviness, because they're the ones that came to us and said, this is exactly what I'm looking for. And that is how we got our first 1,000 clients, 5,000 clients, 10,000 clients, and to be honest with you, our identity hasn't changed much since. Because we're not going after the one millionth and first client, we're really still in a very early stage of our business and they are the clients that have resonated well with our business. And then, obviously, there is the whole element of trust to lay on top of that. These new online propositions, especially in the early days, no one had heard of the term "digital wealth management" or "robo-advice"; the press hadn't really started to talk about these businesses. And one unfortunate thing that I keep noticing time and time again is a lot of these businesses only have the resources to do digital marketing, and the problem with digital marketing only as a distribution strategy or marketing strategy is that you're competing against quite spurious investment propositions as well. And we saw that most prominently last January or so when crypto-currency was at its peak. It obviously meant that you were competing against firms that were selling rather complex and risky investments to the same type of investment group. So for us it was about trying to build a brand that people could trust within a smaller cohort, and then also being willing to use marketing methods outside of just the digital landscape. So we supplement a lot of what we do with the offline marketing world. So be that face-to-face meetings, we host seminars where we invite 100, 200 people in a room. They get to meet the founders, they get to meet the team and ask questions. There's a lot of value in the traditional way of actually marketing these businesses, especially in the beginning, where, like I said, we're not looking for the one millionth customer.

    Mary-Catherine Lader: This theme you touched on about trust and whether it's correlated with established brands or with technology or not is something we talk a lot about on The Bid, particularly because we increasingly trust these very personal services to massive companies who do things with our data in a really evolving regulatory regime. So particularly in financial services, as you're at the forefront of new ways of interacting with our money and technology, what have you learned about what builds trust with consumers? What works and how applicable do you think that is in this new world?

    Adam French: I think that you're spot on. Trust is one of the biggest challenges that we've had as a start-up, and we try to engage clients on that topic as much as possible. It's not something that we want to shy away from. For ourselves, it's getting ourselves directly in front of clients as much as we possibly can. People still trust humans more than they do algorithms, even though it's been scientifically proven in some areas that algorithms can beat humans for decision making purposes. At the end of the day, we still want to hear a story, we still want to speak to people. I've heard clients say before that they want to see the whites of my eyes before making an investment decision. The more we can do that in the early stages, it then allows us as we start to scale to have built that early trust with that early group of users. Then, we have to focus less and less on that over time as we become more of a brand and bigger than the individuals. We continue to run about 200 face to face events a year across the UK and Germany.

    Mary-Catherine Lader: Wow.

    Adam French: The other element as well – and it's again to do with the fact that people trust humans way more than they do technology for certain areas. It's being present for customer services reasons. Yes we are a robo, and yes we automate as much as we can where things can be automated, but we have an award-winning client services team that provide really high-quality customer service-related solutions to our clients, be it in an app, be it on the phone, be it via email. But it's unfortunate that we actually get the ability to compete there, because I think financial services has done such a poor job historically at customer service that just by staffing a relatively small but high quality unit that can really help our clients with whatever needs they have. There is a lot of value there. And we obviously monitor all of these statistics, we're continually optimizing the solutions that we have. So be it the way that we have integrated chat within our app, the way that people engage on the phone, collecting as much of that data as possible and running analytics on it, and then ultimately integrating that with the product development process that we have. We have a smaller organization that can really think about how we can integrate certain solutions into the product that we're ultimately building as well. And that is a different organizational structure, but that's a different topic altogether.

    Mary-Catherine Lader: Last question, so you have all of this data and analytics on what people are doing with their money. You have a digitally savvy, comfortable group of customers. How has Scalable changed, if at all, how people engage with their money? Are they more likely to sell quickly, are they asking more questions, do they engage more often?

    Adam French: What we do see is that in the beginning, people are very untrusting of what we're doing, and I measure this in how many times they open the app in the first week or the first couple weeks of being a client. And it can be sometimes up to several times a day. Because they're just uncomfortable or not as comfortable with the process in the beginning, because this is the first time they've seen what we're doing. Over time, you see the amount of times that people are opening their app, looking at what is going on, decrease to a frequency of once a week, once a month. Around that, we supplement the app with a huge ongoing engagement strategy around what is going on in their portfolio, what's going on in the market, which is also personalized to the way they interact with the service. So even though we're providing a lot of automation, the service also provides a lot of personalization because we can measure the way that you behave, the way you are logging in, what you're doing when the market is performing in different ways. So are you selling, are you buying, are you canceling a monthly payment that you might have coming in? And as we all know, investing for the long term is really where you get the best compounded returns, and so we do the best we can to try and get people to reduce the bad behaviors and ultimately increase the good behaviors. And since we've started measuring the effectiveness of some of those campaigns, you can see that clients are undertaking those behaviors less and less. So for us, it's all about these marginal, incremental gains that we can do to try and help our clients to make the right decisions.

    Mary-Catherine Lader: Well, that's extremely hard change to be driving. We also have similar efforts and I know how hard it is, so congratulations on that, and lots, lots more to come. So let's wrap with a quick rapid fire round. Sound good?

    Adam French: Shoot.

    Mary-Catherine Lader: Okay. So how do you manage your money?

    Adam French: Through Scalable.

    Mary-Catherine Lader: There can't be a different answer; that is the right answer.

    Adam French: Any other answer would be wrong.

    Mary-Catherine Lader: In the spirit of technology, are you pro virtual reality or augmented reality?

    Adam French: I'll flip the question a little bit, what's not to say that we're not already living in a virtual reality?

    Mary-Catherine Lader: So heavy, serious question. You had me speechless here for a moment.

    Adam French: That's what Elon Musk believes, right.

    Mary-Catherine Lader: Exactly, exactly. Favorite lunch meat?

    Adam French: Chicken.

    Mary-Catherine Lader: Okay. So that was a trick question, I hear that your wife has a sausage shop.

    Adam French: That is true.

    Mary-Catherine Lader: Why aren't you a supporter of her sausage shop?

    Adam French: I ate too many sausages in the last two years when she's been on the journey, so unfortunately, I can't say that anymore truthfully.

    Mary-Catherine Lader: And in ten years, what will robots be doing and not doing?

    Adam French: I struggle with the ten year one because we typically underestimate how much change is going to happen in the next ten years. So if I was to say ten years, then maybe robots will be living and breathing and walking among us.

    Mary-Catherine Lader: Nice Bill Gates reference there. And a good answer. It's been such a pleasure talking to you, thanks so much for joining us.

    Adam French: And thanks for having me.