With the ever-increasing use of technology, intensified competition in the financial services industry, and the growing value of assets under management (AUM), the advisory sector could not have remained unchanged. Wealth management is entering new landscapes as ‘robots’ are taking over the human element in providing advice to investors, especially to the younger demographic, on how to invest their money. Surveys from Legg Mason found that investors aged between 18 and 39 trust online platforms to the same extend as human financial planners, and in the UK specifically 85% of millennials are comfortable with such a solution.[1] A robo-advisor in simple terms is an online wealth management service that replaces human financial planners with algorithms to manage a client’s portfolio. Robo-advisors use exactly the same software as financial planners without getting involved in the more personal features of wealth management. According to a survey conducted by Deloitte, AUM at the leading 11 robo-advisors in the United States account for $19 billion in 2014, which equals to a 65% increase from the previous 12 months.[2]

Business model and investor appetite

Depending on the business model, an investor can either get software-based delivery of automated investment advice (direct-to-consumer) or, if the service is advisor-assisted, they can receive a phone-based financial advisor who is accessible through a digital channel. Additionally, investors can turn to traditional methods where they can have face-to-face meetings with a dedicated advisor who can assist on future financial planning. With these business models in mind, there are two different types of investors who might use these platforms, defined by the size of their investment capital. Smaller-scale investors would most likely use a service like Investec, which offers accounts with a £10,000 minimum balance.[3] For example, a tech-savvy, millennial investor might use this service to combine returns with lower fees and minimum balance requirements. There are also services offered to investors with higher capital, like those offered by Affinity Private Wealth and Coutts. These services have minimum balances of £500,000 and £1,000,000 respectively,[4] which would typically be chosen by high net worth individuals who value the guidance and more intimate relationships with their trusted advisors.

The direct-to-customer model, as the name suggests, is offered directly to consumers providing a diversified portfolio charging them an approximate fee between 0.25% and 0.50% AUM where minimums may apply. Alternatively, if the investor chooses the advisor-assisted model, he or she will be charged a fee between 0.30% and 0.90%,[5] still lower than the fee wealth management firms typically charge. Bear in mind, fees vary depending on the investment types, as do the available investment vehicles. Robo-advice can only be performed on exchange-traded funds, sometimes including stocks, whereas a wealth management firm advises investors on a variety of vehicles, ranging from stocks and bonds to alternative investments and structured products.

The key differences between a robo-advisor and human financial planners:

Taking the four stages of the client-advisor lifecycle model into consideration, we can examine the differences and similarities between robo-advisors and human financial planners.

  1. Understanding client needs

Currently, robo-advisors can gather client information based on simple surveys that enable them to understand their clients’ needs and preferences, risk appetite, and consideration of outside accounts. They do not take into consideration the fact that people are more than a portfolio – different people have different goals and concerns for both the short- and the long-term regarding their wealth accumulation and consumption. Sometimes a more face-to-face approach is the only way to make an investor comfortable that their investments are being handled correctly according to his or her unique circumstance.

  1. Propose solutions

Based on the surveys conducted online, robo-advisors can develop and propose a financial plan, suggest fairly simple (rather than complex) investment vehicles, and generate proposals based on what the investor wants. Despite the fact that they operate based on award-winning algorithms, they cannot synthesise or customise solutions based on an individual’s needs or concerns.

  1. Monitor results and adjust strategy

Whilst monitoring results, robo-advisors are able to execute performance reviews, create dashboards, and generate status alerts. They can produce market updates based on research and client preferences, however they do not have the ability to support or continually develop clients through difficult markets.

Can the two coexist?

Bearing in mind the continuous technology advancements within the financial services industry, we anticipate that robo-advice will play a key role in the way wealth management operates. Competition will push for better versions, possibly including machine learning that will be able to consider various clients’ complexities by adapting questions based on former replies. Furthermore, we expect that when it comes to proposing investment solutions, they will be able to include more complex assets as well as handle individual securities. In this way, they will be able to integrate multiple goals while developing a stable financial plan. However, despite the developments in technology, there is no expectation that human financial advisors will ever abandon their profession. Various surveys conducted in the wealth management industry indicate that approximately 77% of clients fully trust their advisors and plan on continuing working with them to manage and grow their wealth; 81% also claim that face-to-face interaction is crucial.[6] The future may point towards a hybrid service, where part of the portfolio would be managed automatically and part by the investment manager. The balance could be crucial to increasing the longevity of the investment managing service and providing the optimal experience to the client.