Are Robots Rocking Your Boat?
Robo-advisors have taken the investment management industry by storm and their meteoric growth seems unstoppable.
Robo-advisors have taken the investment management industry by storm and their meteoric growth seems unstoppable. In 2014 , the overall assets under management (AUM) attributed to robo-advisors were just $20 billion. Just two years later, Betterment, a leading US-based robo-advisor, passed the $5 billion AUM milestone, and then grew by 70% to hit $8.5 billion AUM a year later. Betterment's phenomenal growth isn't an isolated example. Wealthfront and Personal Capital are other US-based robo-advisors managing $5 billion and $1.52 billion of assets respectively.
Accenture , Deloitte , and PwC believe that robo-advisors are only just getting started. These algorithm-based programmatic solutions are alluring: their advice is data-driven and free from personal biases, their fees are reasonable, and they're always available to provide clients with real-time access to solutions and reports in just a few clicks. They've been able to penetrate some key segments of investment management, such as tax and retirement planning, goal-based investing, exchange traded funds' (ETF) focused solutions, and even socially responsible investing. An April 2017 Burnmark report analysed the world of robo-advisors and provides some interesting numbers: (i) the US has more than 200 robo-advisors; the top 10 have seen their AUM at a CAGR greater than 100% in the last five years, (ii) Europe has more than 70 robo-advisors of whom five mange more than EUR 100 million, and (iii) between India, China, Singapore, and Japan, Asia has about 61 robo-advisors. Considering the stellar growth that robo-advisors are seeing, investment management professionals are speculating about the impact of these technology platforms on their clients, holdings, and on their careers.
A wave of disruption: Robo-advisors in 2017 and beyond
In an age of technology-enabled innovations, customers seek smart, savvy digital solutions, whether they're buying a movie ticket or investment product. Considerably more popular among millennials, robo-advisors are also a hit with GenXers and Baby Boomers too. A Broadridge / Aite report suggests that client assets on digital advice platforms will more than double from $65 billion in the first half of 2016 to $160 billion by the end of 2017, and the robo-advisory market is projected to be valued at more than $400 billion in assets by the end of 2018.
So, what constitutes digital advice and what is its exact role in the investment management industry? On one end of the spectrum are those pragmatic solutions that list ETFs, bonds, and shares, use an online questionnaire, and make recommendations based on a matching algorithm. At the other end of the scale are fully automated investment platforms that use artificial intelligence (AI) and big data to analyse spend patterns, use self-learning algorithms, and automatically balance portfolios based on smart customer insights. Their biggest competitive advantage is lost-cost, transparent advice.
A recent CFA Institute FinTech Survey found that robo-advisors will have a substantial impact on investment management in the short to medium term. A more in-depth study on the 'Future State of the Investment Profession (FSIP)' , says fintech disruption will change the face of the industry in the next five to 10 years and suggests that industry leaders must transform if they want to continue to thrive. Paul Smith , CFA, president and CEO at CFA Institute believes that the industry is at an inflection point, and that there is a critical need for firms to adapt more quickly to new situations. In the investment management industry, much of that fintech disruption is attributed to robo-advisors, although technologies such as Application Programming Interfaces (APIs), big data, and AI are also impacting other segments of the value chain.
The industry isn't taking the threat lightly.
BlackRock and Envestnet acquired robo-advisory firms back in 2015. Charles Schwab and Vanguard, have built their own robo-advisory solution.
You'll find that leading investment management firms are building a hybrid-model that uses technology to: (i) make their advisors smarter and faster, and (ii) turbocharge their back-end systems to build efficiencies and synergies, and in-turn, reduce costs. Customers, who trust these big brands, seem to love these solutions. Vanguard's two-year old robo-advisor, dubbed 'Personal Advisor Services' now has $65 billion in AUM (15 May 2017). Charles Schwab's Intelligent Portfolios has an AUM of $15.9 billion (31 March 2017).Robo-advisors: Wading into India and making a splash!
In India, robo-advisors debuted in 2009. FundsIndia, one of the most successful robo-advisory start-ups, set up shop in India with AUM of INR1.5 crores (approximately $220,000 at current exchange rate). By 2012, the company built an AUM of INR187 crore ($30 million), which grew to INR3,000 crores ($460 million) in 2016. It expects to reach INR10,000 crore ($1.5billion) within the next 18 months. That estimate seems achievable in light of the June 2016 report by EY 'Winds of Change: Wealth Management Reimagined', which points out the huge potential that India's 125 million middle income professionals provide to robo-advisory firms. Comfortable with technology and in need of qualified financial advice, they're the perfect audience for firms looking to grow in this space.
Mutual Funds 2.0, an India-focused 2017 survey by PwC, predicts that robo-advisory will soon become a core offering at asset management firms, banks, and other financial service firms. The shift is driven by wage inflation, allied training costs, and the investments required to acquire new customers.
The regulator Securities and Exchange Board of India (SEBI) is also looking to simplify and improve how robo-advisors work in India. Its International Advisory Board recently suggested that SEBI will facilitate with a tough yet open view on innovations. The prospects for robo-advisors are bright. Does this spell doom for investment management professionals?
The short (but loud) answer? NO!
John L. Bowman, CFA, Managing Director, Americas, CFA Institute noted that no commoditised option will ever be able to offer clients the level of care, flexibility or personalised solutions that a qualified and properly trained wealth manager can. I agree. The hype with robo-advisors and the rise of low-cost, algorithm-driven, real-time digital solutions will do two things for customers: (i) make the industry more competitive and efficient, and (ii) reduce costs, especially where management fees are concerned.
The market seems to be slowly correcting itself. Mary Erdoes, head of wealth management at JPMorgan Chase believes that customers will want that human interaction once markets get tougher. Perhaps hedging its bets, her firm has tied-up with InvestCloud to take advantage of technology and to possibly integrate it as a core offering in the future.
But talk of the demise of human advisors is an overreaction. They aren't really losing their jobs to robo-advisors. They're losing a little bit of AUM to them but it's nothing they can't catch up with. Betterment CEO John Stein's decision to hire human financial advisors to attract more clients should provide some reassurance.
To succeed in the new-age and highly efficient investment management industry that's bearing down on us, advisors need new skills and training in their core domain and in soft skills. The FSIP study found that organisations retooling for the future are instilling a culture of ethical decision making, alongside specialised financial analysis skill and sophisticated IT skills. CFA Institute has also integrated big data, AI, and robo-advisory into its CFA Program curriculum.
In the long run, robo-advisors will make the industry more efficient and more cost-effective. And while existing leaders will need to use technology to improve their operations and empower their investment managers, advisors too will need to upgrade their skills to stay relevant in the new world of investment management.
About the author: Vidhu Shekhar, CFA is the country head of CFA Institute in India.