Why robo-advice could be the right way to plan your retirement

Henry Macleod
Henry Macleod- CFA, Co-Head of
Digital Distribution, EMEA

In the digital investment revolution, BlackRock is the right partner for savers seeking the scale and trust that suits their individual needs

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

New technology is making financial investment easier for everyone – democratising it, if you like – by providing end investors with cost-efficient, diversified portfolios they can access 24/7.

Robo-advisers have been leading this charge since they were launched in the UK a decade ago, although consumers may be disappointed to learn that robo-advice has nothing to do with robots.

The good news, however, is that these advances in digital technology can help get more people investing for their future. Joe Parkin, Head of Banks and Digital Channels at BlackRock says “One of the indirect consequences of COVID 19 is a greater focus on financial well-being. Individuals are becoming increasingly focused on getting their finances in order so that events like we’ve seen in 2020 can be overcome”.  According to Blackrock’s People & Money survey 2020 (BlackRock, April 2020) 78% of the 26,814 people we spoke to globally do not believe they’re on the right path to have the income they want in retirement.

It also matters because far fewer people are investing than some experts might have anticipated a decade ago. According to the same survey, 49% of the 4,013 UK respondents believe investing isn’t for them.

Technology equals efficiency

Using digital technology such as robo-advice reduces inefficiency and allows companies to build crucial scale. As Adam French, co-founder of BlackRock partner Scalable Capital, explained: “We ultimately wanted to take away the inefficiencies in our business, and we do that by automating as much as possible, and making it as convenient as possible.”

In the modern world people are more afraid of investing than of digitisation. As Oliver Dreiskaemper, head of RoboAdvisory, Deutsche Bank, told WealthTech 19: “Everyone can use an iPad. People are more afraid of investment, so you need to focus [your education efforts] there. Everyone will use technology at some point in time – the question is how distribution channels will work, and how you can build trust with customers and explain investments to them.”

BlackRock focuses on providing clients with what they need and building it to scale. Expanding distribution channels has not always been easy for smaller fintech companies, but as BlackRock manages over $7.32 trillion in assets, it knows a thing or two about scale (BlackRock, July 2020.)  All amounts given in USD.

Building scale and trust – and offering a service that really does democratise investing – also means bringing in a new, expanded customer base that includes women and minority groups.

“Success ultimately means we are making wealth management accessible to all clients, and taking their needs and desires into account,” Smera Ashraf, head of retail bank and discretionary at HSBC Global Asset Management UK, said. “For me, as a Muslim, if I have the option of a sharia-compliant portfolio or mortgage I would choose that first. ESG (environmental, social and governance) choices, for example, are important for a certain demographic.”

Getting your portfolio right

Just because a proposition is mass-market, doesn’t mean it’s not institutional in quality. BlackRock works with its clients to deliver professional products at scale, with each solution tailored to the client’s needs. This can be through:

  • Providing technology solutions – both proprietary and through partner firms
  • Creating model portfolios and investment strategies based on in-depth risk analysis.
  • Providing investment building blocks that resonate with end investors.

BlackRock can create off-the-shelf portfolios, customise portfolios for clients or simply provide resources and expertise, however big or small their investment needs.

Gonzalo Pradas, head of wealth management at Openbank, a partner of BlackRock, said: “In the digital space, why shouldn’t you be able to access excellent and professional investment portfolios? We believe in proper asset allocation with a high-conviction philosophy – one we can maintain over time.”

And asset allocation need not be plain vanilla: BlackRock in line with their commitment to sustainability has a model of ESG portfolios which can include liquid alternatives and factor tilts, as well as providing low levels of correlation in portfolios. This ensures the portfolio is diversified enough to weather the ups and downs of the market and recover from market shocks quicker.

Stephen Crocombe, managing director, head of client portfolio solutions EMEA at BlackRock, explained how the iShares website now shows the ESG score for any fund and its exposure to controversial sectors – even if ESG is not the main focus for a portfolio.

“Clients now view ESG as a differentiator to build whole portfolios,” he said. “For example, the ESG score of the S&P 500 is lower than that of the Euro Stoxx 50, which may influence the client’s geographical allocation.”

A seamless future

In the digital future, we expect more people to invest seamlessly in products that work for them as individuals. The BlackRock People & Money Survey found a perceived shift in future interactions from human to technology. In the future as more people invest; there will be an increasingly seamless integration of technology; and that robo-models will need to expand to facilitate all aspects of wealth management, from saving and investing to retirement income.

“I’d like to see robo-advice inside workplace retirement plans,” said Paul Newmann, vice president of digital wealth at BlackRock. “Although [American] target date funds have done a good job to get investors on the right path with the right equity exposure, two 55-year-olds have different lives and need more personalisation than that.”

Technology has the potential to prompt end investors in the right direction.

“For instance, during dips you typically see more people shifting to conservative portfolios even though that can actually be the wrong move,” Newmann adds. “So technology can step in with dynamic messaging asking customers, ‘Are you sure you want to do this? It changes your tax situation and you won’t meet your goals.’ Most of the time clients do not follow through on that irrational impulse.”

Adam French thinks people will soon be investing without even really knowing it.

“In five to ten years’ time, the concept of investing will be more integrated into daily life,” he said. “You’ve seen this with the success of the UK’s pension auto-enrolment scheme, and the adoption of investing services behind the scenes, like with day-to-day banking and consumer services.”

He pointed to Uber – where technology allows clients to reach their destination without having to reach for their wallet.

“What I like about Uber is they integrate financial services into their product without making it about financial services at all,” he said. “We now take that technology for granted.”

BlackRock is here to help clients embrace this digital future. With decades of experience in investing mean we can advise on a broad range of strategies and have the tools and expertise to combine them exactly for your needs. Contact us to discuss how we can help.

Risk. Reference to the names of each company mentioned in this communication is merely for explaining the investment strategy, and should not be construed as investment advice or investment recommendation of those companies.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or financial product or to adopt any investment strategy.