Robo-advisors, the new wave in FinTech
FinTech has ushered in a wave of disruption in financial services, and robo-advisors have now become a reality in wealth management. Robo-advisors are becoming increasingly popular as they offer automated, algorithm-driven financial planning services with little to no human supervision. The money which is saved on not paying a human is passed through to the customer, resulting in younger, less affluent, less investing-savvy folks being able to get in on the action.
Consulting firms estimate that the services could be managing more than $10 trillion within several years, according to Forbes. Financial companies including Morgan Stanley, Wells Fargo and Bank of America’s, Merrill Lynch, have followed FinTech firms, such as Betterment, with their new offerings.
Innovation in the investment technology space is creating a fierce race among start-ups, brokerages, wealth management, Private equity, Real Estate firms and insurance companies to serve a shifting and evolving account base. Asset and wealth managers should learn to adapt, else they will lose their competitive advantage. The future of wealth management will depend on how products targeted at new investors evolve with their users’ maturity. We will see new products offered from these FinTech companies, cross-pollination for partner brands, as well as acquisition and consolidation.
At SGG, we are seeing a real hike in the number of asset and wealth managers who use robo services. A robo-advisor is an on-line financial advisory firm that leverages automation and algorithms to help manage client portfolios. That automation empowers robo-advisors to offer investment management, automated portfolio planning asset allocation, online risk assessments, account rebalancing and other digital tools and services to consumers for a fraction of the price of a financial advisor that is human. Lower fees, combined with superior features like automatic rebalancing and tax-loss harvesting, can yield higher returns.
Robo-advisors create an opportunity for asset managers to target the mass affluent who are looking for cheaper alternatives. However, the innovations under the umbrella of “robo-advisors” are becoming more sophisticated and, thus, enable advisors to service higher net worth accounts. Fees are competitive and range between 15 to 35 basis points of AUM. Traditional wealth management firms and financial advisers charge 1 percent of AUM or higher.
To what extent can robo-advice become a global trend? Lower fees and the digital transformation affecting the financial services sector has become a universal theme. The main strategic issue for traditional players who enter the domain of robo-advice seems to be the impact upon their current business. A vexing issue for those players with a very large AUM base is the potential cannibalization of their fee revenues. If these players shift to a robo-advisor model and charge lower fees for the same AUM, they will, in essence, have to attract a larger AUM base to make the same fees as before, while at the same time investing in new technologies to support the automated planning and digital toolkits. To maintain profitability in the midst of these capital outlays, cost cuts might have to come from a reduction in headcount among their financial adviser sales force. As the robo-advisor race continues, firms will need to consider these trade-offs and craft an appropriate entry strategy to evolve and compete.
As the financial landscape continues to evolve in the light of the digital revolution, there is no doubt that robo-advice is here to stay. At SGG, where we are specialising in helping Fintech companies to set up in Europe, and offering full-fledged solutions based on our in-depth knowledge of Global Fund markets, we are excited by the prospect of supporting clients who will develop the next wave of innovative solutions for the future.
Yvar de Zwaan
Senior Business Development Manager, SGG Netherlands