British high street bank Natwest launched a robo-advice service at the end of 2017 to target customers that typically didn't have access to investment services. Now, one year later, the bank is ready to talk about the challenges it faced along the way.
Speaking during Finovate Europe in London last week, Nick Johnson, head of digital investing at Coutts - the private bank where all investment functions are centralised within the Royal Bank of Scotland Group - explained how Coutts' clients, which includes the Queen, showed little appetite for an automated investment advice service, leading to its launch under the more consumer-facing Natwest brand in 2017.
"I doubt the Queen is at Buckingham Palace right now using our robo-advisor, and we did test this concept with our customers at Coutts and it didn't land that well to be honest with you," Johnson said, "but when we tested the concept with Natwest customers the ideas landed very well."
The result was Natwest Invest, a robo-advisor service for existing Natwest customers with a low barrier to entry and a flat £10 advice fee.
Investment advice has traditionally been out of reach for a vast majority of the UK population, but the rise of robo-advice promises to open up that market for non high-net-worth clients.
Robo-advice is a wholly digital service which involves algorithms instead of costly human advisors, which automatically assign a risk appetite to customers and then makes relatively low-risk investments on their behalf, typically in exchange traded funds (ETFs), complete with management dashboards and lots of contextual information.
Natwest isn't the only established financial services brand looking to get into robo-advice. Startups like Nutmeg and Wealthsimple made early inroads with consumers, but Natwest, Santander and HSBC have since followed in their footsteps.
That doesn't mean there weren't challenges for Natwest along the way. Taking them one by one, Johnson ran through what they learned during the process of building the first robo-advice service from within an established high street bank.
Suitability standards and risk profiling
First was the all-important risk profile. A new customer of Natwest Invest will be assessed on their risk appetite via 16 psychometric questions. However, "risk profiling tools aren't 100 percent accurate," Johnson said.
Most good investment advisors will start with a risk profile but talk it through with the customer to make sure it maps with the customer's expectations. To replicate this in a digital environment means giving the customer access to their risk assessment, say it is a low risk appetite, and explaining what that means for their portfolio, complete with sliders to see if they actually want to up their risk a little in exchange for higher potential returns.
Next was determining suitability standards and adapting what would traditionally be a long, face-to-face suitability assessment into a digital experience.
The result is a three-page suitability report after the onboarding process, "which may sound like a lot but if you have seen suitability reports produced by face-to-face advisors they are very long, so that's very good I think," Johnson said.
Another challenge was a fairly typical one for a legacy bank: systems integration.
"We have loads of data but our systems are absolute crap, so you can't get them to talk to each other easily, it takes a lot of time," he said, "but when you speak to the regulator they expect everything to be just there, so how do we crack that and make it work for the customer?"
On this point Johnson takes his hat off to the technical team, saying: "Certainly all the core information on our main back end systems comes through, so we don't ask your name, address, bank details; so we have covered the hygiene factors. But we haven't yet properly integrated all the back office data into the front office journey."
The bank has also been looking to utilise open banking APIs to streamline the fact finding part of the process, but "at the moment the data quality just isn't good enough," he said, "the transactional data is too mixed up."
Compliance and disclosures
Another long-standing issue is in-built conservatism at the bank, manifested within the compliance department.
"I spend too much time on the phone with our compliance colleagues, who are really, really risk averse, so risk averse and their default is to tell the customer everything, which means pages and pages of disclosure. We have daily discussions with them around what we do and don't have to include, so how to crack that mentality of disclosure is the ultimate risk mitigation tool," he said.
The result remains a fairly text-heavy experience, with lots of disclosures. "We lost that battle, frankly," Johnson said, "so we need to do more to refine it."
The bank is taking an analytical approach to this problem, using a set of tools to spot what customers are actually reading and taking that back to compliance to evidence the fact that much of this text is overkill.
"It's great to be able to show our second line colleagues that customers aren't reading it and having good discussions to make things more succinct."
Streamlining the experience
Somewhat linked to the disclosures issue is the nature of the customer journey, which Johnson described as quite lengthy, with multiple specific questions and various 'kick out' points where customers might be better served by saving more money or starting a pension, for example, instead of investing.
"We are in our proposition very detailed on fact finding and I was a little nervous about the length of sales journey, but we find that by asking quite specific questions and providing quite specific kick outs, that builds a lot of trust in the service, which has tested well with customers," he said.
For example if someone says they are investing for their retirement, Natwest Invest will point that customer towards pensions, while explaining that this might be a better option with better tax benefits, and asking them which direction they may want to proceed in.
The key here is to provide "specific actionable points" like building up more liquid savings before diving into investments.
Last was pricing and charging.
"I think at the moment the rules create regulatory arbitrage between discretionary portfolios and funds," Johnson said. "What I mean is, if you are an online discretionary investment manager the rules say you don't have to charge for giving advice, which is great. Our proposition is a fund proposition, so because of a wrinkle in the rules, we have to charge because we are providing a personal recommendation to go to a fund.
"A customer doesn't care about that, they don't care if it is a discretionary portfolio or a fund, they just know they should be investing. So how do you price when someone is given something for free and you are told by the FCA you have to charge? Awkward."
The result is a flat, one-off £10 advice fee, with a management fee of a maximum of 0.6 percent of your investment per year, and a 0.35 percent platform fee on your investment per year, both on top of that.
"We had a long discussion about how we should charge. We frankly set this charge based on the business case, expected customer volumes and costs in order to break even because frankly we can't compete with other robo-advisors if we are out-priced.
"Where to charge was also something we grappled with," he added, plumping for after the suitability report, with the bank seeing few drop offs at that point of the sales process.
The early responses have been polarising, with the very first customer stating: "I was really impressed by the advice I received. The £10 charge made it a no brainer and it was really great to be able to do it in my own time at home."
Not everyone was as happy with the experience however.
"I'm really shocked and disappointed that Natwest don't want me to invest," another response read.
The resulting challenge for Johnson and his team is to make sure the built-in exit points are less blunt and more thoughtful, to help those disgruntled customers feel less frustrated by the experience.