Feature: The rise of the robo-adviser

Using machines to give financial advice makes financial decisions cheaper, turns swathes of left-out consumers into new savers and investors and removes human bias in deciding where and when assets should be bought or sold. But is the robo-advice revolution without risk? Pedro Gonçalves finds out

As the big financial firms are making it harder for even HNWIs to gain access to certain advisory services, robo-advice is bringing costs down and eliminating barriers for what used to be exclusive, expensive and highly personalised advisory services.

Through technology, consumers are now given easy access to customised wealth planning, portfolio allocation.

For instance, Scalable Capital, launched a low-cost financial advice service with sessions with and adviser provided at a fixed fee of 200 on top of an initial, free consultation. On the other end, JPMorgan upped its minimum investment limit from $5m to $10m.

However, even as it brings costs down, that does not mean it is not making money.

According to a Juniper Research study, robo-adviser platform revenue will reach $25bn by 2022, up from an estimated $1.7bn in 2017. The automated investment platforms are widening the appeal of wealth management with their delivery method via intuitive smartphone apps, according to the study.

Adapt or die
Robo-advice is thriving in the mass affluent market segment, which has traditionally been underserved. It is also giving wealth management firms access to a large new market of millennials who are interested in accumulating wealth, but have had only limited options in terms of investment management.

As a large segment of the population, especially millennials seem to shun traditional advisories in lieu of cost effective technologic solutions, the sector is under pressure to look at its fees and technology strategy.
Although robo-advice to date has gained only a miniscule share of assets under management (AUM), it presents investors with an interesting value proposition— with a price reduction of as much as 70% for some services—and its rate of growth is both rapid and accelerating, according to a report by Accenture.

"Fintech and digital are accelerating the ability to evolve for managers. To some extent, this is about offering new functionality or apps that meet specific needs. But these are short-term fixes. What the sector really needs is a structural upgrade so that it is prepared to meet the evolving, future needs of investors as well," Mark Trousdale, EVP and CMO at InvestCloud told International Investment.

Per Wimmer, chief executive at the Wimmer Family Office agrees that the disruption in the sector ultimately benefits the client. "Fintech solutions can have meaningful cost advantages allowing smaller investors to benefit from services and advice they were perhaps previously unable to access," he said.

Despite the digital disruption to the market, the Juniper report found that traditional wealth management players are also adopting new technologies to evolve their business models.

A move that is leaving many financial advisers worried about their jobs in the future.

The algorythm threat
Analysis published by Forrester Research estimated that, by 2019, robotic automation would change up to 25% of the work associated with all job categories.

The risk is even greater for financial services. Over two-thirds of junior finance professionals in the UK fear that automation of core processes is a threat to their role, according to research from analytics technology firm Metapraxis.

Still, while 67% feel their job is at risk by this technology, 78% agree that it will enable the creation of more strategic value in their finance department and overall business.

"For years it has been known that finance employees feel threatened by the impact that new technologies will have on their day to day role and job security. It is no huge surprise that even digitally native millennials feel the same. However, what our research shows is that unlike their predecessors, these individuals clearly understand the value that data and analytics can bring to the finance function, which is particulary encouraging," Simon Bittlestone, chief executive of Metapraxis said.

The human factor
As much the technology behind robo-advice evolves and artificial intelligence becomes more reliant, there is one thing that financial advisers bet it will never replace: the human touch.

"Financial planning or advice is a personal service that requires experience, skill and technological knowledge with the appliance of ethics so to ensure tailored solutions specific to an individual," Jonathon Webb, pensions consultant and financial adviser at Montfort told International Investment.

"Basing recommendations on digital algorithms goes against all these principles which can be both damaging and disastrous; particularly so for especially complex financial cases," he continued.

"Take into further account, our own daily workings with a global network of affiliated IFAs, tax agents, investment managers and legal professionals we regularly call upon to ensure the best solutions for our clients.

"Ranging from representatives from the UK's own tax office HMRC, the IRS in the United States, to experienced IFAs in Germany, Australia, and beyond - how would a robo-adviser deal with this interaction?" he asks.

For Webb "robo-advice has no place in high-level, complex financial planning".

Mark Trousdale believes that no technology can be successful without a human hand at the helm. "The interaction of digital and human empathy is the key to effectively servicing these specific needs.

"This is hybrid wealth management; offline and online services that work harmoniously together to create a better experience for the client, and greater levels of engagement for the manager. It means a better understanding of clients and therefore leads to more opportunities to expand the share of wallet."

Accenture research indicates that 77% of wealth management clients trust their financial advisers and want to work with them to grow and manage their wealth. Furthermore, 81% say that face-to-face interaction is important - the highest figure of all channels.

Robo-advice will add new capabilities that wealth management firms will need to adopt and integrate but human financial advisers are not quite finished yet.

This article is also featured in International Investment's latest special report on fintech, which is out now.