Digitizing Wealth Management through Robo Advisory Services

Roboadvisory is new type of financial service that uses mathematical calculations to allocate wealth across different asset classes and is characterized by minimum human intervention. Some of the principles guiding the working of Roboadvisors are given below -            

·     Markets are fairly efficient in the long run;

In the short term, markets rise and fall, but in the long run the losses and gains to the investor averages out. Over a 40-year period, only 12% of the actively managed funds bettered their indexes.

·     Passively managed funds outperform actively managed funds in the long run;

Roboadvisors are based on the philosophy that actively managed funds don’t work in the long run and the investor is better off putting his money in a low cost, passive index fund. Legendary investors such a Warren Buffet have recommended on a number of occasions that you simply put your money into the S&P 500 and walk away.   

·     Roboadvisory services provide better and more consistent advice;

Human emotions like greed, indecision, irrationality are not played out, because RoboAdvisory services are powered by algorithms.     

·     Educated customers hold equities in their portfolio two to three times higher than    less educated clients  

The use of gaming, short animated video and quizzes to teach customers about fees, passive investing  

How do RoboAdvisory services work?

In the first step, the investor is provided with a questionnaire that assesses risk appetite through various inputs such as age, occupation, income, long terms goals etc.

 Once the risk appetite is understood, the investor is provided a diversified portfolio consisting of various asset classes like mutual funds, equities, bonds and so on. The portfolio is customized for every customer. For example, an investor in his 50’s would have more debt than equity in his portfolio. On the other hand, a 30 something would have more equity than debt on his portfolio.

Account rebalancing and tax harvesting facilities are provided for a small fee. Roboadvisory fees are as low as .5%.

Benefits for wealth managers

·     Low cost distribution channel to mass affluent segment

Helps fintech startups like Wealthfront compete by lowering expenses ratios by using mobile as a distribution channel   

·     Regulatory and risk compliance

A strong regulatory environment emerged after the 2008 financial crisis. Robo Advisory ensures that these regulatory compliances are met through automated portfolio alerts and risk management tools as well as digitally enabled risk and compliance tools and processes. 

Benefits for customers

·     Better and more consistent advice

Since roboadvisory services are based on algorithms, they avoid the irrationality of the crowds. In Milton Keyes words “The market can remain irrational longer than you can stay solvent” Roboadvisors provide better and more consistent advise in volatile markets

·     No upfront fees or hidden commissions

In active approach to investing, the cost of research, offices, salaries, bonuses are borne by the investor. In passive investing, the investor benefits because the savings are passed to them in form of lower costs.     

·     Faster response times

Since they are automated, Robo Advisors are able to take decisions quicker than their human counterpart. Advances in AI/Machine learning is only going to make the services better over time. 

·     Better education for self-service investors

Self-service option creates more opportunities for learning, which drives the market further.    

How has the market evolved over the years?

First generation roboadvisory services removed human bias in wealth management services, by bringing automation and reducing costs.

Next generation of roboadvisory services, also called Roboadvisory 2.0, leverages the developments in machine learning to understand client’s finances in greater depth and detail. For example, DBS Bank’s wealth advisory service is based on IBM Watson's cognitive computing technology, which is able to analyze research and reports using that information to match clients risk appetite with their investment objectives and preferences. Robo 2.0 brings new asset classes like bitcoin and venture capital startups to provide more value to the investors.    

Where are Markets heading?

According to Business Insider, the US is still the market leader, with more than 200 robo advisors. It is followed by Germany (34), UK & China (20) and India (19).

In the US market, robo advisory services have shown a significant uptake in the market. New services like Betterment and Wealthfront have significant traction in the market. Incumbents are also making quick inroads into digital and scaling quickly.

In Europe, there are banks providing roboadvisory services on their own or as white labeled services. Next generation services leveraging self-learning artificial intelligence for scanning client portfolios are becoming popular. Leading players include FIncite, Wealthify, easyfollo, Deutsche bank.     

In India, fintech startups as well as incumbents have launched roboadvisory services in the last few years. Services include autopilot advisory services for the new investor to providing full services for the matured investor with complex financial requirements. Some of the leading players include FundsIndia.com, Aditya Birla MyUniverse, Scripbox and more.

The economic slowdown in China has piqued the interest of its middle class in roboadvisory services. Ant Financial’s YueBao wealth management platform has gained significant traction in the last few years. Startups like Xunji, a unit of Pintec group has grown in popularity in millennial segment. According to expert, Baidu, Tencent Group, Aliba are best placed to unlock customer data to drive innovation in this market.

You want to hear more about Robo advisory services, come and visit us from Nov 7th to Nov 9th 2017 @AfricaCom in Cape Town, Comviva meeting room 12.