The European Banking Authority (EBA) warns that robo-advice poses a challenge to wealth management firms as the technology continues to gain a bigger market share of assets under management (AUM) and provides a more cost-effective service.
Europe’s regulator said in a report analysing the risks of fintech that robo-advice is also gaining clients from traditional wealth management firms because it is cheaper.
“Robo-advice wealth management services appear to target retail investors with also increasing
offerings for institutional investors. Such services aim to be at low cost thanks to their reliance on
automation and are typically available online, aiming to be highly scalable. Robo-advice seems to
offer accessibility and affordability for customers who may previously have found wealth
management services unaffordable,” the report said.
For EBA, the traditional wealth firms that are not able to adapt, might lose out in the end. “Competition from new, relatively low-cost and highly scalable robo-advice services could possibly
affect the profitability of incumbents in the event that they are not able to adapt and compete.”
“While potential competitive pricing might enhance the efficiency of the financial system, it could
place competitive demands on established traditional asset managers to consider more
competitive pricing and thus lower fees,” the report added.
Currently, the US is the leading market for robo-advice, with about $300bn AUM. In Europe, robo-advisers are entering asset management predominantly through the UK, Germany and Italy, according to the Swiss-based Financial Stability Board (FSB).
However, the proliferation of automated advice, brokerage and asset management still seems to be at a relatively early stage in Europe, EBA said. As a result, the report concluded that additional cross-sectoral requirements are not necessary at this stage, but it will continue to monitor the evolution of the technology.