Is robo-advice the future?
By Marc Wiese, General Manager of Warwick Corporate Services
The rise of financial technology (Fintech) throughout the financial services industry has promulgated many new and exciting opportunities, one of them being robo-advice. Robo-advice is a type of financial advice that is provided to the investment and wealth management industry via an online system with limited, or no, human intervention. Often this is done via an online automated investing service.
As the investment industry has become more efficient over the years, the focus on cost-cutting has become more prominent, resulting in numerous financial services groups launching an online robo-advice offering. The question, therefore, arises: “Is robo-advice the future?”. In order to answer this question, we need to look at significant market trends, as well as the positives and negatives of both personalized financial advice and robo-advice.
Robo-advisors generally target younger individuals below the age of 30. These individuals often do not yet have large lump-sum savings and therefore seasoned financial advisors sometimes underservice them. Rather, personalised financial advisors typically remain focussed on high net worth individuals (HNWI’s) and receive a financial advisory fee for their specialised services. Furthermore, younger people are often more au fait and comfortable with online electronic applications.
Yet an important aspect to this question is whether people are willing to trust computers to manage and advise on their hard-earned money? There is an enormous amount of unfamiliarity with robo-advice and numerous psychological studies demonstrate that personalized financial advisors provide an important component of the investing process. This speaks to the human trust element, hand-holding, personalized interaction and financial needs analysis.
On the other side of the argument is the fact that robo-advice can be offered at a lower fee rate and, therefore, decreases the overall cost of investing and potentially increases the net return. This assumes, however, that the correct advice (such as that relating to tax) was taken, the correct investment structures were implemented and the correct risk-return analysis appropriate to the individual was concluded.
Robo-advice may also assist in removing the ‘emotional’ aspect of financial advice. This being said, in most cases, well-qualified personalized financial advisors should also be in a position to better explain volatile market conditions and the required changes to an investment, or in a more personalized manner than a robo-advisor.
One further factor is that the implementation of the Retail Distribution Review (RDR) has the potential to significantly decrease the earnings of a personalized financial advisor on smaller investments over the short-term and many concerns have been raised by the industry relating to who is going to service clients with very basic planning needs or smaller investment portfolios. Often these clients do not necessarily require a fully-fledged financial plan. It is in such circumstances that robo-advice may become an appropriate offering.
The Business Insider has reported that, of the $74 trillion worth of Assets Under Management (AUM) managed by wealth managers, robo-advisors are forecast to be managing around 10% of global AUM by 2020. The conclusion is that robo-advice is expected to grow its market share and as the technology improves and becomes more trustworthy, coupled with millennials growing older and increasing their wealth, inevitably robo-advice will become more prominent.
In the short- to medium-term, however, personal investors tend to trust professional advisors and human interaction will not be replaced by an artificial intelligence ’AI’ system any time soon. Indeed, the ability of one person to connect with another and understand their needs is still core to most clients seeking to build and consolidate their hard-earned wealth.