How it all started:
In the year 2008, during the period of the Great Recession in the U.S., Betterment launched the first robo-advisor for their investors to manage passive, buy-and-hold investments through an online interface. Initially, clients had to employ a financial advisor to benefit from this innovation.
Fast forward to now, the wealth management industry is poised to enter a disruptive phase; and at the heart of this disruption is robo-advice. The advent of modern-day automated investment advisors in the financial advisory space is witnessing a game-changing trend, which is predicted to grow exponentially in the next few years.
Today, the share of assets managed through robo-advisors only account to a minuscule number. However, a BI Intelligence report predicts that by 2020 robo-advisors will manage approximately 10% of the total global Assets Under Management (AUM), which amounts to around $8 trillion. This report also states that investors of all sizes and asset types have shown to be receptive to robo financial advice. A good 49% of investors are willing to allow some of their assets to be managed by these advisors.
As technology evolves, we are likely to see more unconventional and customer-centric products through the robo platforms, with the possibility of further industry consolidation and adoption among the traditional asset managers.
Busting the top 3 Myths around Robo Advisors:
Digital investment advisory or robo-advisory, as we like to call it, is becoming more popular than ever owing to low service fees and ease of use. There is still a huge population of investors who prefer human advisory services partly due to the assumption that there is an absence of human intervention in robo advice. To that end, we would like to debunk the top 3 myths that will ease the mind of wealth managers and investors alike.
#1 – Robos manage the Funds, and this is not Safe
As the name suggests, robo-advisors are simply advisors and not enforcers or money managers. They are also called digital investment advisors who provide automated algorithm-driven savings and investment guidance, through an interactive online interface.
Typically, the first step taken by the robo-advisor is to garner information from investors through an online survey. The survey is used to collect information about their financial understanding and situation, propensity for risk, and future goals. This information is used to develop a portfolio for the investor. As an ongoing process, the portfolio is automatically rebalanced according to the wealth managers’ investment mandate.
Strict adherence to regulations and data security measures is the status quo for any investment firm; robo-advisor-backed wealth management firms are no exception to this. These firms ensure that funds in online accounts are protected using multiple security features, including the protection of personal information related to investors. These firms are subject to the same strict regulations as are any other companies in the financial industry.
#2 – Serving Millennials is Unprofitable
Investors between the ages of 17 and 36, also referred to as Millennials, are an awesome technology-loving demographic who represent 87 million Americans. Though Millennials are open to trying new technology, they operate with small account balances, which may seem unprofitable at the outset. Rather than shrugging off these potential investors, firms must reach out to those who have a good-paying job but have not saved a lot and turn them into valuable clients for the future.
A lot of young people are making good money but are not always making good financial decisions. To get into the Millennials game, incumbents must adopt a different mindset and get creative with service models and fee structures to forge deep and long-term relationships.
To conclude, this change in mindset will go a long way and could hopefully grow Millennials’ investor accounts to a point where they become more profitable and are ready to accept the traditional asset-based fee structures.
#3 – An experienced human advisor is better than a robo-advisor
Investors can benefit from the best of both worlds! The industry has witnessed a steady growth from $19 billion in 2015 to more than $24 billion in 2016 and is only poised for growth. It is not easy for an investor to make a decision overnight and switch the management of their life savings from a human advisor to a robo.
To help investors take the first step, wealth management firms must build trust by helping them manage some funds through robo advice and subsequently compare the results with that of a traditional advisor. The key is to also educate investors on their options and allow them to research, ask questions and make informed decisions.
To meet the changing investor expectations, incumbents have already started acquiring startup robo-advisory firms. This technology is here to stay no matter how investors decide to manage their money. It stands to reason that wealth managers who are not using technology to build and manage their client’s portfolio are doing them a disservice.
The way Forward with Robo-Advisors:
With the fast gaining popularity of these advisors in the fintech landscape – startups, brokerages and wealth management firms are fiercely competing to serve a shifting and evolving investor mindset. Robo-advisor-backed services present investors and wealth management firms with the following value propositions.
Investors:
Affordable Advisory Fees: When compared to the fees of traditional wealth managers, robo-advisory fees are significantly lower, thereby driving faster adoption. The marked reduction in fees is now attracting mass market investors who are very likely to opt for this mode of advice which can be further tailored to meet their unique needs.
Always Available: Now more than ever, tech-loving Millennials with their small balances as well as affluent seniors are steadily showing inclination towards robo-backed wealth management for the simple reasons that it offers more control, increases accessibility and allows them to explore options in their own timing without pressure and at their own convenience.
Wealth Management Firms:
Smart Personalized Advice: Investing in big data and advanced analytics can help wealth management firms leverage the robo platform to deliver personalized financial advice that promises to manage and improve portfolio investments in an automated or semi-automated manner.
Hybrid Advisory Services: Changing needs of customers and continuous developments in technology will make adaptation essential for incumbents. Automated financial advisors with their lean technology platforms demand a fast pace of change and acceptance. To increase the value for clients across their investment spectrum, wealth management firms must look at ways to incorporate robo-advice capabilities within their existing advisory offerings to create hybrid models.
The beginning of the Robo-Advisor Journey:
Wealth management firms are faced with the challenge to continue growing at the same pace while simultaneously remaining competitive in the evolving landscape. Therefore, it is imperative to invest in new technology and streamline the investment process with an equal focus on building a reliable brand.
Overall, we believe robo-advice capabilities will affect profound and permanent changes in the way advice is rendered. The glaring differentiator comes in the form of low fees. For initial consumption, robo-advice may need to be packaged and marketed as a tool for investors who love to play with new technology.
Investment firms could potentially expand the scope of robo-advice by broadening the space to include financial planning in retirement, health and well-being. Wealth management firms of all sizes must take notice and closely follow developments in this disruptive technology space as it is here to stay and is already impacting many investor segments.
