The Evolving World of Robo Advisors
Robots are getting faster and intelligent. Last year, a Rubik’s Cube was solved in less than a second (to be precise, 0.637 seconds) by a machine. It beats the previous best of 0.887 sec by another machine (Human best is 4.904 seconds). This year, an Artificial Intelligence (AI) powered machine won a 20-day poker tournament.
From Tesla’s autopilot to virtual personal assistants like Siri & Cortana – AI based machines are constantly improving our lives, for now. They have also entered the financial space – where they are acting as advisors on people’s wealth. It’s a welcome relief for those who never understood taxes or those who lost a fortune on bourses.
While Robo Advisors and human advisors work on the same algorithms and financial models, the machines do a better job being faster and free from any biases. Lower fees, transparency and easy access to a larger population are the three critical factors that make Robo Advisors a preferable option.
Consumers across all asset classes are receptive to robo advisors – including the wealthy. 49% of this group would consider investing some of their assets using a robo advisor – Business Insider
73% of respondents in a survey reported investing with automated investing platform satisfactory or very satisfactory – Financial Planning Association and Investopedia
Though most of the investments are still done in an old-school manner with investors preferring human advisors, the trend is likely to see a reversal. For wealth management firms, there is a largely untapped market opportunity in offering low-cost digital platforms to people who have so far lacked quality advisory for their investments.
Moreover, the technology will not be restricted to numerous proprietary algorithmic models as AI-powered advisors will make their space. Hedgeable, a wealth management company, last year announced its AI-powered system which simplifies specific tax management concerns for its high net worth clients. The system pulls data from more than 20,000 financial accounts, live real estate data, and is capable of self-learning.
Market Potential
Investment firms
Investment firms have already used the technology to assist their financial advisors (CFPs) in investment management and financial advice. Using this hybrid approach allows human advisors to focus on other critical areas where Robo Advisors have yet not entered (or being used sparingly). This is because people in particular cases have shown affinity to their traditional ways; examples include estate planning, tax-planning, and retirement planning. Thus, the firms offering a mix of both ‘personalized human’ and ‘low-cost automated platform’ based advisory are in particular better placed in the market.
High net worth individuals (HNIs)
“High-net-worth individuals use online investment tools more than other investors” – My Private Banking
In the survey-report with inputs from 600 HNIs in the US and the UK, 70% respondents rated automated advisory tools positively. Their ratings were based on the experience with onboarding processes such as registration and account opening, which are more efficient, quicker and highly convenient with automated tools. Thus, investment firms seeking better investment experience for their prime accounts are increasingly adopting Robo Advisors.
Millennials, retirees, and almost everyone
Though figures and projections vary, almost everyone agrees that people interested in investing will have a high exposure to automated tools by 2020. As people get used to personal digital assistants and AI driven chatbots, trust and comfort levels with Robo Advisors are only likely to increase. This trend is likely to influence people across all relevant age groups and geographies.
Is it a disruptive trend?
Although it looks like a disruptive technology, it hasn’t gained traction. Startups relying on digital-only models have failed to make a considerable impact, partly because their major USP is only the lower service fees. While Robo Advisors reduce any oversights or guesswork, their returns are still comparable to what being offered by human advisors. Further, costs related to employee salaries, tech-infrastructure and compliance reduce their profit margins to unsustainable levels. Hence, the technology is being used to its maximum by incumbents – which is not much. The technology is primarily restricted to the US and some European markets. There is a need to extend this platform to emerging markets where there is a lot of space for accelerated growth.
The biggest uptake
While the industry is unanimous about the long-term viability of Robo Advisors, numerous tangible benefits can be drawn on an immediate basis. Incumbents have nothing to lose by experimenting with the platform. They can use the technology to expose, publicize and leverage their existing algorithms to a wider audience. By evaluating their performance, incumbents can scale up their business to automate a larger portion of their business. This approach can help incumbents to stay on top of the technology, offer better customer experience and make appropriate changes as and when required.
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