Robo-advice: the good news

A few blogs back I grumbled at some length about this robo-advice thing, basically saying the word “robo” is bad and the word “advice” is even worse (the latter because “advice” isn’t at all what customers think they’re buying – they think they’re buying a nice, simple, packaged, online investment).

However, looking back on it, I wonder if I may have accentuated these linguistic negatives somewhat at the expense of a more important positive.  I’ve been banging on for literally years about the need for the investment industry to start developing product concepts that are designed to make sense to consumers in the post-face-to-face-advice era, and – despite the regrettable confusion generated by the name – I’d say that these new robo-advice services are pretty much what I’ve been talking about.

The proof of this is arguably to be found in the way that full-fat DIY-ers look down their noses at them.  For individuals happy to spend hours every week on their Hargreaves Lansdown account rebalancing their portfolios, a fully-packaged service which requires nothing more of the customer than a single short questionnaire is altogether a bit on the simplistic side.  But the thing about those individuals – as, again, I’ve said many times – is that there aren’t very many of them.  For millions and millions more of us, that single short questionnaire is just about all that we can be bothered with.

As I say, it’s not at all good that we’re still using the word “advice” to describe these propositions even though the most important and attractive thing about them is that they don’t actually involve or require any.  But there you are.  In the horribly hidebound world of investment, an innovation that’s even partially successful is something to be celebrated.

The triumph of brands over experience

(Yes, I know, it would be a better headline if the word “brands” rhymed with the word “hope”.  Oh well.)

Over the last few days, I’ve been having my first airbnb experience, trying to sort out three or four places to stay during a short trip in the New Year.

I suppose the initial online experience is OK, although there are some highly un-intuitive page layouts and the whole thing certainly conforms to my comments about idiosyncracy from a few blogs ago.  But it’s once you’ve tried to book somewhere that it all gets very tricky.

I may have been unlucky, or maybe people took an instinctive dislike to the slightly self-conscious personal profile that I was obliged to provide.  (Or maybe it was just that it was obvious from my photograph that unlike the large majority of male users, I don’t have a beard.)   But for whatever reasons, it happened five times in three or four days that my bookings were accepted, and then within 24 hours cancelled again – involving me in a less-that-straightforward refunds procedure, and of course the need to go through the whole rigmarole again.    (In the end, I decided to quit while I wasn’t too far behind, booking half the trip on airbnb but turning to expedia for the other half.)

This was all extremely tiresome, and not at all what I expected from the service that has been hyped as the future of leisure travel.  But here’s the thing:  at a brand level, I don’t really mind.  In a service industry sector where we all agree that brand perceptions are overwhelmingly driven by experience, my experience has been rather less than mediocre.  But I still perceive the brand as the future of leisure travel, and I expect I’ll still go back to it again.

This doesn’t really make sense.  My not-very-positive experience should be powerful enough to overwhelm the fairly feeble positives built up in my mind by seeing some posters on the tube and reading some PR in the newspapers.  But somehow, it doesn’t work like that:  with brands that you kind of like, as with people that you kind of like, you’re willing to set aside the negative experience and carry on with the liking.

If there’s some kind of general theory about how brand relationships work, and specifically about how some kind of positive emotional engagement can offset a whole lot of negative experiences, it’s obviously important to try to understand how it works.  Can anyone help me with this?  If anything’s been written on the subject, I’d like to read it.

How to make money on the England v Italy game. Maybe.

I remember someone telling me years ago that in what was then the emerging era of online betting, there was an easy and certain way to make money,  Bet on international competitions only, and arbitrage the distortions in the market resulting from the emotions of each team’s home fans.

So, for example, imagine England are playing Italy at football.  Bet on England with an Italian bookie, and on Italy with a British one.  I can’t remember how, or where, you’re supposed to bet on a draw, but I do remember that the emotion factored in to the available odds means you’ll make a profit whichever team wins.

Yes, OK, this is all a bit hazy, but I now have some evidence to support it.  For reasons I won’t bore you with, I recently found myself one of a group of about 25 taking part in a Rugby World Cup sweepstake – and I should say that all but about three of us were middle-aged male actuaries, who you might have thought would be a cautious and level-headed bunch not overly prone to outpourings of nationalistic emotion.

The aim of the sweepstake was to pick the first four, in finishing order.  At this point, I do have to murmur modestly that I did in fact win, with the first three right and in the right order (no, I didn’t spot Argentina – who did?).  But my point (or at least my other point, alongside the point that I won) is the reason why everyone else lost:  the reason is that out of about 25 of us, all but three picked England as one of the final four.  In fact, of course, we didn’t even make it out of the Group stage and into the final eight.

Which goes to show that the “emotional distortions” I was talking about are absolutely for real, even among a research sample made up almost entirely of actuaries.

England are in fact playing Italy at football this weekend.  If this blog helps you make any money, a note of thanks would be welcome.


How disruptive must disruption be?

It’s one of those words, “disruption.”  A digital-era word that has been used and over-used across the digital economy for at least 10 years (maybe more), and has now fairly recently landed in financial services.

It’s in the title, for example, of a new publication from the consulting firm EY (to be exact, the document is called “Disruption In The Life, Pension and Investment Markets”).  And although the weakness of my position arises from the fact that I haven’t actually read past the first page of it yet, it still made me ponder, on my journey into the office this morning, whether I think, by digital economy standards, that what we’ve seen so far in financial services really amounts to “disruption.”

Certainly the industry has had to contend with a whole load of change.  My involvement is this whole weird world dates back fairly exactly to the passing of the 1988 Financial Services & Markets Act, which introduced various important ideas like the distinction between tied and independent advice, and the changes – occupying all four boxes in every offsite strategic brainstorming’s PEST analysis – have come thick and fast ever since.  But by the digital community’s definition of the world, do they amount to “disruption?”

Of course the difficulty I’m facing with this blog is that there is no digital community definition of the word.  It’s a judgment call.  But I’d say that the first and most obvious sign of disruption is the sweeping-away of tired old legacy players, and their replacement, either immediately or at least pretty rapidly, with shiny new digital players.  Uber is disruptive because it’s supposed to kill black cabs.  Amazon killed small bookshops.  Wikipedia killed encyclopedias.  Digital photography killed Kodak, Polaroid and pretty much the whole film-based photography industry.

Or, second, if sometimes the legacy industry lives on, then the “disruption” consists primarily of bringing about a whole new kind of consumer behaviour that the legacy industry had never encouraged.  Low-cost airlines, for example, have got millions of us all going off for long weekends in Vilnius or Katowice in a way that sad old British Airways had never imagined.  eBay is apparently responsible almost single-handedly for the massive growth in self-store facilities around the country, because huge numbers of us are now trading in something or other – vintage jukeboxes, Norton motorbike parts, low-cost Polish strawberry jam we bought from a bloke we met in Katowice – that we need secure storage for.

If you look at life, pensions and investments for signs of developments like any of these, the picture is pretty mixed.  Some legacy players have disappeared, although usually as a result of mergers and acquisitions than anything more dramatic.  But with only one big exception – workplace pensions, of which more in a minute – I can’t say that the shiny new breed have achieved any great success.  There are certainly dozens of new or newish entrants in pretty much all parts of the industry, but the very large majority are small and struggling.

Disruption may be imminent.  In particular, the slew of D2C investment services now coming onto the market under the terrible “robo-advice” descriptor might really change the sleepy old investment industry.  And as I just mentioned, as the auto-enrolled workplace pension sector gathers momentum, it may very likely achieve a strange slow-motion kind of disruption, diverting more and more mass-market long-term savings into young brands and businesses like NEST, NOW Pensions and The People’s Pension rather than any of the legacy alternatives (be they pensions company, bank, shop or pub).

But that’s the thing about disruption in financial services.  It always seems to be on the point of happening.  If you look at all the major sectors of the market over, say, 30 years or more, the only one that I would say has been clearly and fundamentally disrupted is general insurance, where the coming of Direct Line back in the mid-80s really did change everything.  Otherwise, on the whole, we wait and hope.  Or, in the legacy industry, we wait and fear.



More on this customer-acquisition-cost business

I think I may finally have found something to say in conference presentations which gets some attention, and hopefully not in a Gerald Ratner way.

At the Platforum conference three months or so ago, I did a talk about the cost of acquiring customers, and particularly about the hopeless situation and brief life-expectancy of start-up financial services businesses with no customers and no money to recruit them with.  In this talk, I quoted the very first hard numbers that I learned in the world of financial services direct marketing a million years ago – that whatever your proposition, market sector, target market or media strategy, on the whole, as a universal average, at least for initial planning purposes, you’re doing OK if you can generate a lead for £30 and acquire a customer for £200.

Much has changed since I first learned these numbers – well, let’s face it, nearly everything has changed.  But at least for initial planning purposes, I’d say they still work.  (They certainly work a very great deal better than the ridiculous notion that in today’s world of social media you can recruit any number of customers for no money at all, except perhaps the bus fares of the intern you get to write your Twitter posts.)

What’s interesting – by which I mean both surprising and pleasing – is how much interest these numbers of mine have attracted, and indeed continue to do so.  For example, a new Finametrica report on the emerging robo-advice (bleurgghh) market quotes a typical customer acquisition cost of £200:  without paying £995 for the report I can’t tell whether or not they’ve nicked my number, but let’s just say it’s a funny coincidence if not.

The great thing about a figure like this, of course, is that you can build a whole business plan on it.  If you want 10,000 customers, it’ll cost you £2 million to acquire them.  100,000?  £20 million.  A million customers?  £200 million. And so on.

Of course there are lots of reasons why it’s not that simple.  Particular businesses have particular issues which will force their costs up or down.  There are many of these, and perhaps the most important are the economies of scale, or perhaps as I always say the diseconomies of lack of scale:  if you only wanted, say, 1000 customers then the full weight of your establishment costs would bear very heavily on them.  The figure will require some refinement in the light of your specific circumstances – and of course the best and most accurate refinements will be made in the light of real-life experience.

But still, it’s something.  And as a corrective to the view of all those clever people starting up new FS businesses of one sort or another who all seem to be assuming they can recruit their customer bases for nothing or next to nothing, it’s actually something quite important.

In Professional Adviser’s piece about the Finametrica report today, they mention various robo-advice start-ups tackling the customer acquisition cost challenge.  One of these named in the piece is that well-known deep-pocketed financial services giant which is “Rutland-based Echelon Wealthcare.”

When the history of the robo-advice market is written, and the names of the firms which made the crucial breakthroughs are listed in the roll of honour, I will be astonished – no, let’s make that totally bloody dumbfounded – if Rutland-based Echelon Wealthcare is among them.