Robo-advisors are changing wealth management
It’s here. The rise of the machine. Or perhaps a more appropriate phase would be the tsunami of robots, as technology sweeps across industries, disrupting the norm and throwing civilians jobs into question. First it was the industrial industry, now the tidal wave has reached the financial industry – with wealth management at the forefront of FinTech investment.
Automated financial advisors, also known as robo-advisors, are changing the landscape of wealth management. Platforms like Hedgeable and Wealthfront in the US and Nutmeg in the UK are providing personalised portfolios for their customers, using increasingly more sophisticated algorithms and drawing from ever larger data sets. The CEO of robo-advisor Hedgeable has predicted that, in the coming years, old fund managers will become misinformed due to their lack of efficiency. Already, “digital” wealth management assets’, including those at traditional firms, has reached an estimated $55-60 billion.
Robo-advisors have reduced costs by reducing one of the major costs to the financial sector – salaries. With low barriers to entry, the number of successful start-ups in this sector is high. This in turn increases competition, further driving down the cost of digital wealth management services. Robo-advisors have also made investing more accessible for novice investors and the mass affluent, a market segment that has previously been underserved. Financial advice can now be provided conveniently by a computer screen, something that was thought to appeal to the younger generation and their technology-based way of life.
However, a recent report conducted by Salesforce suggests this is not the case. The majority of people are still interested in face-to-face interactions with an advisor. There remains a clear desire to have a personable advisor, someone to ask questions, express financial concerns and trust their assets with.
A half-human, half-tech advisor is needed. Some robo-advisor platforms are now including options to interact with a human, and marketing themselves as having the best of both worlds – savvy technology, and a friendly human advisor. After all, a human advisor can do something a robot has not yet learnt how to do – they can provide emotional support and behavioural coaching. With this combination, automated financial services have the ability to positive affect the mass affluent sector.
But for High Net Worth (HNW), Ultra High Earners and Institutional Investors, robo-advisors are unlikely to change much. These individuals are willing and able to pay the higher fees for traditional wealth management, offering them complex, tailored advice that current robo-advisors are not capable of. In a recent FinTech survey by the CFA Institute, 80% of respondents (who are CFA charter holders) thought that robo-advisors would have either no or a negative effect on Ultra High Earners, with 60% thinking the same for HNW investors.
Overall, robo-advice has expanded the customer base for financial advice. Reduced costs and improved market access has increased competition between companies, providing more choice for customers and enabling them to select the best deal. With demand still remaining for human advisors, full-service advisors are using robo-advice to help serve smaller accounts and increase advisor productivity. For now, it seems, robots and humans can work together peacefully. The next threat will come from emotionally-enabled AI.