ThinkAdvisor with Lisa Kramer 10 January 2018
Opportunities for wealth management are growing among consumers with lower and moderate incomes – as well as millennials – by increasing use of robo-advisor technology, according to a recent study.
Juniper Research says that with new opportunities for automation, fintech firms are also “moving in to disrupt the market.”
The changing environment comes as robo-advisor platform revenue is projected to total $25 billion by 2022, compared to an estimated $1.7 billion in 2017, Juniper said.
With these growth opportunities, robo-advisors are making wealth management “more open and inclusive,” Nick Maynard, a research analyst at Juniper Research, told ThinkAdvisor. “Robo-advisors are actively broadening the appeal of wealth management.”
Total assets under management by robo-advisors will jump to $4.1 trillion in 2022, from an estimated $330 billion in 2017, the study adds.
“By automating services, costs are reduced and fees are reduced, so the barriers to entry are much lower,” Maynard explained.
He also points out that smartphone apps lower the barriers to entry, too, and they make investments easier and more convenient, especially for millennials.
Maynard doubts the growing automation will completely replace the traditional role of financial advisors. “Particularly for HNWIs [high net worth individuals], investment is something that is built upon trust and a long track record,” Maynard said. “Part of investing large sums of money is building up relationships with trusted advisors.”
As a result, financial advisory firms will “need to emphasize their credentials and experience” and will need to present themselves “as a trusted expert,” Maynard said.
Moreover, Howard Yu, a management professor at IMD, predicts the image of some financial advisory firms may change. “In the past, all financial advisory [firms] looked very similar. They all projected a sense of security and stability. They looked, by and large, traditional. But if robo-advisors’ target audience turns out to be the millennials and the underserved, the communication style of these service providers will naturally project a very different image, much more upbeat, fun, and contemporary.”
He cites the earlier example of what took place in the airline industry, as Southwest became an industry “disruptor” in the late 1970s.
In addition, larger wealth managers can use robo-advisor tech themselves, Maynard says. “By offering a branded app, these firms can combine their brand name and reputation with competitive fee structures.”
Or, they can use a hybrid approach, where an investment advisor is available to discuss options when it is required by the specific circumstances of the investor, Maynard said.
Robo-advisors then become an “assistive tool,” the Juniper report explained. “Machine learning is still leveraged to create investment advice, but this advice is then shaped by trained professionals before being given to the customer.”
Yet, Vasant Dhar, a data scientist who teaches at New York University, warns, “We are a very long way from complete automation.”
“It will take some time to develop trust in machines, for investing, like real track records,” he added. “For the foreseeable future, there will be everything from partial to complete automation. I’ve been at the right-hand side of this continuum myself for many years, but it has taken time to create a real machine-based track record that not only investors can inspect and analyze, but I can, as well, to get a sense of the behavior of the machine and how to improve it. Real data on performance is essential to build trust.”
Still, some robo firms “may consider complete automation as an avenue to further reduce costs,” Lisa Kramer, a management professor at the University of Toronto, said.
“But I don’t foresee a day where automation dominates the robo-advisory marketplace,” she said. Some investors will want human interaction, if, for instance, they are investing for tax planning or retirement. Also, some investors will feel “comforted by knowledge that their portfolio benefits from a human touch. Being able to reach a live customer service agent by phone or chat, or knowing a human manager is overseeing the robo firm’s investment funds, will lend a degree of reassurance that many people will be willing to pay for,” Kramer said.
Furthermore, she predicts some robo-advisors will distinguish themselves by the types of niche funds they offer and will help investors plan for life events.
“Essentially, this means clients of robo firms will have more to choose from than simply funds that offer vanilla indexing,” Kramer said.
From his vantage point, Tom Baker, a law professor at the University of Pennsylvania, disagrees with predictions “of rapid growth in fully autonomous financial advising.”
“Instead, the market growth will be in hybrid systems that give customers the opportunity to talk to human advisors,” Baker said.
Baker says the sector will see:
- A shift to advisors with better counseling skills and emotional intelligence.
- Less emphasis on economics and finance training.
- Consolidation in the financial advising market.
- More rapid deployment of investing best practices into the market as these practices are incorporated into the automated tools.
Meanwhile, Juniper also predicts the emerging fintech sector will generate $223 billion in revenue in 2018, and that will increase to $411 billion by 2022. That represents an average annual rate of 16.5%.