The Rise of Robo Advisors in Wealth Managementby Sowmya Krishnan November 26, 2017
Traditional human financial advisors have in the past served clients with more than a million in investable assets. The financial crisis in the year 2008 saw the introduction of the first robo-advisors. Since then, more than 140 digital advisory companies have been launched. Robo-Advisory is now the most in-demand technology in the world of financial services. Asset management firms are continuously innovating and bringing in new versions to stay relevant, with the latest example being the launch of hybrid robo-advisors.
A robo-advisor is a self- service investment platform which collects information from clients about their financial situation through a questionnaire and then using algorithms, the computerized financial consultant offers advice or automatically invests client assets.
The rise of robo advisors is causing costs of high fee Wall Street advisors to go down. As a result, individuals’ incapable of asset allocation and goal setting are being benefited. Until recently individuals had two options, either do it yourself or seek help from a financial investment advisor (FIA). FIA’s have a minimum asset requirement of US$500,000, so most of the lower worth individuals are unable to avail their services.
Investment options have expanded since the introduction of the first robo advisors whose exclusive focus was on Exchange Traded Funds (ETF). Active management and passive portfolio management are currently the two main services being provided by the robo advisors. Active management seeks to outperform the market by continuously analyzing it and suggesting asset shifts accordingly while passive management doesn’t make changes in portfolio allocation and only offers advice.
Acquiring, partnering or building your own solution are the three choices available to the existing financial institutions. Start-ups will help bring services to the market quickly but with the disadvantage, that customer database will have to be shared with the third party. One of the most well-known and biggest robo advisors Betterment’s CEO Jon Stein says, “I personally love the term robo-advisor because I think it helps to popularize our segment. If you think back five years ago, we were really a voice in the wilderness. We were saying, everyone is going to be using automated investment services someday. And nobody was really listening, nobody really believed us. Now that there’s a term to describe in the industry, there’s more of a hook there that people can grab onto. I think that it has helped to kind of give us a place in the consumer’s mind.”
Betterment is the largest online independent investment advisory firm whose assets are growing at 400% a year. It charges US$19 for a US$10,000 account. For the first US$10,000 invested, Betterment charges 0.35% whereas Wealthfront, another robo advisor giant, manages the first US$10,000 for free but has a minimum of US$5,000.
Your net worth and investments complexity determine if you should go for a robo advisor or not. Automated machines may help with the massive number of people and data but certainly cannot guide you where unquantifiable factors come into play. In such cases robo advisors with human elements are preferable.
The Asia-Pacific is the largest growing market for robo advisors. An International monetary report lists the growth rate of Asia Pacific region as 5.6% while China and India have recorded an individual growth rate of 6%. From recorded figures of US$64 trillion in 2012, the global assets under management is all set to grow up to US $100 trillion by 2020. With the largest middle-class population and a growing market for smartphones and other digital technologies, young Asian investors would be more than willing to trust advice given by a machine algorithm assembling the best possibilities for his/her goal.
Regardless of asset size, a number of years in existence; robo advisors are set to become an important part of wealth management firms’ business strategy. The advisory business is still in its development stage but has immense potential for disruption. If you are a young individual lacking investment skill and have a relatively hassle-free portfolio you are the current target audience for these robo advisors. They can help you create decent allocation plans. E-Asset manager is the future of wealth management. Where once human consultant was the focal point, future will see machine taking this spot.