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Reimagining Retail Investments with Robo-Advisory in the 21st Century

Reimagining Retail Investments with Robo-Advisory in the 21st Century
June 10, 2019

The world of finance and investments is constantly evolving, as is the market for retail investment services. From the earliest telephonic exchanges to AI-driven volume trading – technology has always disrupted finance. Today, new innovations and business models have made robo-advisory the most disruptive trend in retail investments.

Evolution of Robo-Advisory and Investments in the Retail Segment.

The earliest robo-advisory can be traced back to the trade volume boom in the United States during the 1980s. During this time, rapid automation and technological adoption, coupled with dramatic improvement in the trading process saw the NYSE daily trading volume reach a record 100 million shares. This was only the beginning.

With the advent of the internet and personal computers in the 1990s, investors assumed more control over their daily investing activities. And before long, online brokerages became popular. Further, the introduction of decimal pricing and exchange-traded funds (ETFs) resulted in the NYSE setting a new daily trading volume record of 4 billion shares by 2007.

Over time, online brokerages either evolved or gave way to digital platforms that provided algorithm-driven investment advice based on investor data, or as we know them today, robo-advisors. In the last five years alone, robo-advisory has grown and is projected to become a $5 trillion industry by 2020. In fact, Deloitte reports that robo-advisory services may possess over $16 trillion in Assets under Management (AUM) by 2025 and will give traditional financial institutions a run for their money.

Demographics Driven Transformation

In the retail investment services, one of the key drivers of growth for robo-advisors has been the rapidly changing consumer demographics. The Pew Research Center estimates that millennials will overtake Baby Boomers in America as the largest living generation, with a population of over 76 million by 2036. Today’s digital retail customers are well-informed, money conscious, and seeking quality investment advice and service.

Given their affinity for digital channels, they are sensitized to user experiences, which, in turn, influences their market decisions. Unlike traditional wealth management methods, robo-advisory caters to this new breed of investors by providing personalized portfolios and customized choices, offering highly effective user experiences.

Going beyond stand-alone portfolio advice, and partnering with other wealth management providers has allowed robo-advisory firms to diversify their offerings at par with registered investment advisors (RIA). These platforms streamline the entire process, from account opening to portfolio selection and asset transfer, therefore, enhancing the investment experience.

The Convergence of Technology

Earlier, the process of buying and managing investments was still largely manual, but this has changed radically. Functions like dedicated fund or management and risk-based portfolio allocation are now accompanied by the complete automation of asset purchase and wealth management, making it the new norm.

For instance, robo-advisors can leverage the capabilities of predictive analytics to monitor changing market conditions and compare them to investor profiles based on risk appetite, liquidity aspects, and investment goals. This allows them to dynamically shift between asset classes to provide a highly sophisticated risk and wealth management solution for every client.

Robo-advisory platforms now deploy data analytics capabilities powered by artificial intelligence (AI) and machine learning (ML) applications, taking personalization of services a step further. Self-learning algorithms and sentiment analysis tools can now track customer behavior to gain deeper insights that help make better investment decisions closely tailored to the investor needs.

Human Emotional Intelligence in the Era of Robo-Advisory

The technology powering robo-advisory has altered the nature of business relationships, which is particularly evident in client-advisor relationships where trust is at the core. Despite the efficiency that automation technology offers, it fundamentally lacks any form of human connection and trust. Let us not forget - greed and fear are the two biggest forces that drive Wall Street, and nobody is totally immune to their influence.

The technology powering robo-advisory has altered the nature of business relationships, which is particularly evident in client-advisor relationships, where trust is at the core.

Almost every investor has, at some time or another, discovered firsthand how easily fear and greed can alter their emotional state and start dictating their decisions. In such a scenario, a human advisor with high emotional intelligence can think rationally while also being able to help keep the investor on the right course. So, even as modern clients look to technology solutions to gain greater customization and control over their investment decisions, they still seek to engage with human advisors when dealing with their personal wealth management.

Certain humane aspects of this relationship, such as reassuring clients during adverse market conditions and persuading them to take bold action can’t be mimicked by machines and, thus, make the role of the human advisor all the more important. Robo-advisory technologies serve to augment the capabilities of these human advisors as they offer clients bespoke solutions while continuing to foster trust in the investment relationship.

As a result, many wealth management firms and institutions are deploying robo-advisory in concert with human agents. This type of hybrid advisory not only appeals to high-value clients who still require a human-touch, but also enables firms to access a larger client-base within the same resources.

The Future of Robo-advisors

Though robo-advisory services offer undeniable benefits, the technology is still at a nascent stage of development and may take another 10 years to realize its full potential. The rising technological advances, particularly in AI and cognitive computing will pave way for next-gen robo-advisory. This will be capable of complex reasoning and exhibit human-level interactions that are based on various subtle, non-quantitative aspects of human behavior.

However, investors may not always desire a fully digital experience only. The ideal scenario, in this case, is to strike a balance between human and robo-advisory capabilities. The 21st century is an era where technology will work to augment human ability in every domain. Firms need to prepare for this evolution and develop a framework where technology is used to foster and grow client-advisor relationships through the value of human relationships.