March 31, 2016

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Robo-Advisory: Growing opportunity.

In near past Robo-Advisory has been one of the most searched moniker in the area of Wealth Management. There has been a continuous shift towards cost reduction, better client experience, long term planning, and the alternate investments; passive investments being one of them. Fast forward a few years to the present, and digital technology has gracefully transformed the way services are being offered in the investments and advisory areas; Robo-Advisors being one of them.

Robo-Advisors have well-programmed algorithms those works upon Investors data to produce customized Financial Plan, Asset Allocations, model creation and management. They facilitate portfolio management strategy with no or almost negligible human intervention. The Robo-Advisors are trained in automated portfolio rebalancing and trade generation. The key approach followed by the algorithms is to invest in low cost ETFs.

With technology acting as catalyst, Investors today have rapidly evolved in terms of knowledge acquisition. They are technology savvy, socially driven and well researched, especially the Millennial. In a culture driven by intense technology base, Investors are expecting fast-paced answers, lower cost, increased transparency, more empowerment with better user experience. Robo-Advisory positively addresses all these features. It provides scientific low touch model of servicing the Investors in comparison to traditional high touch model at a reduced cost. A typical fee charges by Robo-Advisor is ¼ or lower than the traditional Wealth Management service fees, depending on the account size. This has helped advisory firms to plan and target the Investors who are at the bottom of wealth pyramid i.e. the Mass-affluent and Millennial; who cannot afford a personal advisor due low investible capital and high advisory and management fees.

Robo-Advisors are meant to offer,

  • Better technological way of interacting with Investors
  • Lower fees to Investors
  • Lower Distribution cost and Investors acquisition cost
  • Scalability via Technology
  • Better transparency
  • Streamlined simple On-boarding
  • Clean user interface
  • Automated Investment portfolio
  • Organized and concise financials status
  • Online simple reporting
  • Providing social media interaction to Investors

It is prominent from the ace market researches that there is a significant market for Robo-Advisory and is expected to grow healthy in coming years. There are already established players in the market and has room to grow further. Wealth Management Organizations are strategizing the capability by in-house development or by the way of partnerships.

Though Robo-Advisors are expanding at a significant rate, it needs to be seen that till what extent they can displace the high touch human based advisors. It is likely that Robo-Advisors would continue to draw the Investors who could not afford the personal advisor or are not comfortable with high touch advisors. In the long run a hybrid model accommodating best of both the models could get formed with balance between the two likely to vary across investor segments based on - fee structure and ability to pay, Investors financial background and confidence, complexity of financial investment needs. Further, Investors are very likely to continue seeking the high touch advice for matters related to tax, estate planning, emotional issues like elderly investment care.

Robo-Advisory needs to be seen as opportunity as it helps to leverage technology to effectively outsource some of their activities in value chain while focusing the saved time on the elements of advice like - Investor Education, Multiple portfolios, Tax Management, Estate planning, Alternatives; where they can add most value to their Investors and differentiate themselves. Robo-Advisory may force routine advisors to perish but not the good advisors i.e. those advisors those simply act as paid friends but don't add any value have brighter chances to perish.

Robo-Advisory is viewed through a lens of Digitalisation with potential to create immense value at the touch points of Client and System interaction nodes, while helping to achieve the internal operational efficiencies addressing the Client acquisition and Investment Management life cycle. Robo-Advisory already has significant number of players practicing live. There are established players like – Betterment, Wealth front, Future Advisor, Charles Schwab, and Personal Capital. Lot more are working to enter the space, especially the Wealth Management organizations, with a thought to complement their sales force. The way to enter is through - Build, Buy, or Partner.