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HCL Technologies

Digital Advice and Investment

Digital Advice and Investment
Rajesh Kumar Singh - Practice Manager (Capital Markets Solutions), HCL Technologies | September 8, 2017
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Wealth management is undergoing through the disruptive changes .Digital technology, along with stringent regulations, cost pressures, and rising customer expectations is changing how investors interact with their advisors, and how wealth management firms operate.

Social investing platforms, online advisors, personal finance services, and robo-advisors have transformed the existing paradigm of the wealth management industry globally. In fact, latest research shows that the size of the Digital Advice and Investment market will grow exponentially, from $240 billion AUM in 2016 to $2.2 Trillion AUM by 2020.

Digital Meets Advice: The Emerging Model

Essentially, Digital Advice and Investment is an online wealth management service which provides automated suitability recommendation, asset allocation, and rebalancing (portfolio management) on behalf of the investor with minimal human intervention.

A key investing approach used by Automated Investment platforms is to invest in low-cost ETFs that minimize embedded investment costs. Since they utilize technology rather than depending on active management by a human, Digital/Automated Investment platforms charge significantly lower fees than what most financial advisors typically charge. Digital Advice and Investment firms provide online recommendation based on risk profiling and, on agreement, create and manage the portfolio on the client’s behalf by charging AUM based fees.

A Shift towards Automated Investment: Key Drivers

Digital Advice and Investment has rapidly progressed to newer heights, navigating new terrain and expanding in scope as well as reach. The following have majorly contributed to this meteoric rise:

  • The millennial boom: Clients in the age group of 20-35 with limited expense capabilities to open traditional Managed portfolios which require a minimum investment between $25-50K, can avail similar services with a leaner fiscal window (as low as $500).
  • Brokerage accounts: Clients who are not day traders but look at long term objectives-driven investment are attracted towards Automated Investment, given contained fee rates and its sophisticated Algorithm trading and rebalancing rules.
  • Bank savers: Clients who keep surplus cash in banks in their checking and savings account can now receive advice based specialized investment service, for amounts as low as $500-$1000.
  • Tech savvy customers: Across all age groups, clients are more tech savvy and comfortable using online services over personal advice and more human touch points.
  • DOL Fiduciary Role Regulation: The new regulation from the US Dept. of Labor of Retirement plan advisory will change the way current advisory operates. Small investors will have zero advisory services given that their balances cannot support fee-based advisors. Digital investment with its low cost/fee structure, can manage several small IRA accounts, enhancing capacity with the state-of-the-art tech.

Navigating an Uncertain Terrain: Roadblocks & Challenges

Despite a steady growth, Digital Advice and Investment still has to overcome several impediments. As new entrants penetrate the market, the need to provide cost effective services has gone up significantly. Firms such as Betterment provide advice and investment services free of cost for the first 6 months and thereafter charge a nominal fee of 0.15 - 0.35%. Wealthfront also offers advice and investment services for free for up to a $10,000 investment. This race to tap the market and boost AUM gives rise to the question of sustainability with such low ROIs

Additionally, the perceived security and personal touch of a human advisor (particularly in times of stress) is valuable to a certain segment of consumers, especially those with an investment amount higher than $500. As a result, wealth management firms would need to develop a unified client-advisor experience that seamlessly brings together the best of human and robo-advice capabilities in order to gain the clients’ trust and meet their objectives.

Looking Ahead: Keys to Success

To be successful in Digital Advice and Investment it is essential to have compelling offerings for the client as well as a cost effective business model in place to sustain in the market. Factors that will facilitate the growth of investor portfolio and Digital Investments are:

  • Hybrid model - Wealth management firms need to strike a balance between automation and human. The need for human advice will not be completely eliminated in the case of high net worth investments.
  • Tax-loss harvesting - Tax-loss harvesting is a technique used to lower the investors’ taxes while maintaining the expected risk and return profile of their portfolio.
  • Low cost trade security - ETFs are diversified and low cost securities and portfolio should hold a big portion of these to maximize the profit to the investors. Firms using their own ETFs in portfolio will further reduce the trading and rebalancing costs.
  • Asset pooling – Top-tier asset management firms shall use the firm’s pool of securities to allocate securities to the portfolio and rebalance, if required. This way firms need not do any transaction from market as internal transfers will take place between accounts. This will help reduce the trade and operations cost.
  • User experience - Ease of operations is an equally important factor. It is essential to offer a seamless experience across desktop, tablets, and mobiles.

All in all, considering its potential, Digital Advice and Investment is poised to play a fundamental role in the future development of the wealth management industry worldwide.


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