Digital innovations and changes in consumer needs and expectations have fostered the disaggregation of the traditional financial services value chain. This disaggregation has given rise to numerous new options for consumers, one of them being the automation of their investments. One of the latest trends, namely robot based advisory, is gaining traction in the wealth management sector.
So, what are robo-advisors exactly? Robo-advisors are online investment platforms, that automatically perform many of the tasks of traditional financial advisors, with the use of computer algorithms. A consumer answers several detailed questions about their currently financial status, investment timeframe, goal, and aversion to risk. With this information, a robo-advisor is able to recommend an allocation of assets that best fit the consumer’s needs. Additionally, once a portfolio has been created, the platform manages it for you. Not only does it execute trades and rebalance the portfolio itself, but it also offers tax-loss harvesting, low minimum investments, and can often be accessed from several different devices.
Robo-advisory is democratising financial management. Because of the low cost of taking on new clients, robo-advisors are able to serve those with little savings, who couldn’t have afforded a financial advisor in the past. Furthermore, its consumer friendly and the platforms are able to serve everyday people with little understanding of the complexities of financial decision making. These robo services are also helping to avoid conflicts of interest and the potential distrust of human advisors who may just be vying for their own commission.
However, it’s hard to say exactly how these robo-advisors will do in the long run. Due to their recent introduction, robo-advisors haven’t experienced a stock market crash or recession, and it’s hard to say exactly how they would react if they did. Never the less, Business Insider Intelligence predicts that by 2020 robo-advisors will be behind 10% of all global assets under management. What more, we as millennials and Gen X:ers, with our notoriously ‘low’ trust in financial institutions, still accumulating assets, and love for anything digital, are their main target. So what do you think? Would you let a robot manage your money?
Sources:
https://www.businessinsider.com/4-reasons-robo-investing-growing-2017-1?international=true&r=US&IR=T.
http://knowledge.wharton.upenn.edu/article/rise-robo-advisor-fintech-disrupting-retirement/.
https://www.nerdwallet.com/blog/investing/best-robo-advisors/.
