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Robo-Advisors: the New Wealth Managers

by internationaldirector

Written By: Steven Winter – Corporate Finance

Traditional wealth-management firms are facing an increasing level of competition from robo-advisors. These financial technology (fintech) companies have gained prominence in the last few years by offering online wealth-management services at rock-bottom rates. The advice that these companies give their clients is entirely automated. Portfolio selection and portfolio rebalancing are based on an algorithm that takes the risk profile of a customer into account. The lack of human intervention allows robo-advisors to charge fees that may be as little as 0.25 percent of the amount that is being managed. In some cases, the fees are even lower.

A large market

According to a report in The Banker, the “mass affluent” group, which includes those with disposable assets of between $100,000 and $2 million, is the largest and most rapidly growing segment of the wealth-management market. It is expected that the total wealth of this set of individuals will grow from $88 trillion in 2015 to $145 trillion by 2020. At present, this segment is served by retail banks that offer only standardised products. They form a large potential market for robo-advisors.

Robo-advisors provide what the market needs.

Betterment, the largest firm providing mass-market wealth-management services, recently crossed $5 billion in assets under management. Founded in 2008, it has grown from $1 billion to $5 billion in the last 18 months. Investors are attracted by Betterment’s low fees. They charge between 0.15 percent and 0.35 percent of the amount that is invested through them. There is no minimum amount stipulated. The largest individual investor has a balance of $10 million, while the average account balance is just $29,000.

The growing popularity of robo-advisors in the US has resulted in a sharp rise in the funds that they manage. It is estimated that the share of robo-advisors will increase to 5.6 percent of total invested assets by 2020 from last year’s level of 0.5 percent. A study by management consultancy firm A.T. Kearney Inc. found that most of the funds that will be invested through these fintechs are currently managed by the investors themselves.

Traditional wealth managers charge higher fees.

Boston Consulting Group data reveals that in developed countries, wealth-management firms charge their “mass affluent” group clients who have investible funds of between $100,000 and $1 million 1.22 percent of the amount being invested through them. For those clients who are in the $1 million-to-$20 million bracket, the charge is 0.8 percent. Investments in excess of $20 million attract 0.39 percent in fees.


Robo-advisors provide only basic services.

A report by Accenture titled The Rise of Robo-Advice points out that currently robo-advisors use a simple survey to profile clients and understand their needs. An artificial-intelligence system then provides an asset-allocation plan that is monitored and readjusted periodically. The account-opening process is efficient, and the ability to transfer assets is improving. But these online firms are incapable of servicing investors who have complex needs.

According to the Accenture report, robo-advisors will soon be able to provide a far more sophisticated set of services.

  • Financial plans will be developed incorporating several goals. College savings, home purchasing, retirement saving, estate planning and health care will be factored into the plan.
  • It will be possible to incorporate outside assets, handle outside securities and consider low tax-basis holdings.
  • Clients will be able to receive complex advice and will have the opportunity to interact with an automated advisor assistant.

But the report goes on to say that it will not be possible for robo-advisors to provide the entire range of wealth-management services. There are certain activities that can be handled only by a financial advisor. These include reassuring customers when the market is volatile or convincing clients to adopt a certain investment strategy that they may be reluctant to follow.

Market share of robo-advisors set to increase.

Currently the customers that robo-advisors service seem to be a different market segment than those to which traditional wealth managers cater. Individuals who use the services of fintechs usually have much lower amounts to invest. But in the near future, it is likely that even some wealthier clients will switch over from traditional wealth-management firms to robo-advisors. One important advantage that online firms have is that the quality of advice that they provide is the same whether the amount being invested is $1,000 or $1 million.


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