The rise of the robo-advisers
The rise of the robo-advisers
Automated financial advisers - 'robo-advisers' - are coming to the wealth management market with the aim of disrupting the industry.
A robo-adviser is primarily a web or mobile-based wealth management platform offering algorithm-driven automated investment services.
Evaluating consumers' age, risk aversion, income requirements, investment timeframe, income, savings and assets, robo-advisers are able to provide them with investment portfolios that match their needs through smart algorithms and look after trading, rebalancing portfolios and maximising tax efficiency.
With portfolios typically focused on mutual funds, ETFs and cash deposits (for the most risk-averse customers) and exclusively offering general advice, robo-advisers present several advantages, including:
Lower fees: usually free for initial trial periods or smaller amounts, then 0.25 per cent to one per cent of AUM (assets under management) versus one per cent to three per cent starting rates for classic wealth managers
Accessibility: customers can enjoy the services of a robo-adviser with low amounts of investable assets while classic wealth managers have usually much higher minimum thresholds
Automation: data-driven investment strategies and smart rebalancing to maintain target risk levels
Constant access: 24/7 control and access through mobile or web browser
The real strength of robo-advisers' business models is their accessibility and scalability. However, those come at the cost of personal touch and emotional support, sometimes critical to the provision of financial advice.
In the US, robo-advisory firms raised US$290 million in venture funding last year, according to CB Insights.
Wealthfront has reached the US$2 billion AUMs mark in just over three years and Betterment already has more than 70,000 users.
These companies are not only formed by computer science graduates, but also from top Wall Street personalities: WealthFront's chief investment officer is Burton Malkiel, whose book A Random Walk Down Wall Street is an index-investing classic.
This gives comfort to those consumers who still want some level of expertise and know-how beyond the algorithms.
According to their US Securities and Exchange Commission filings, the major robo-advisers already have a total of US$6 billion under management and are expected to grow to US$255 billion AUM by 2019.
Although impressive, these numbers are not big enough to really disrupt the wealth management market - at least, not yet.
To put the numbers into perspective, the US$6 billion managed by robo-advisers does not seem too much of a threat if compared to the US$3 trillion managed by the Vanguard.
The overall market is estimated to account for US$17 trillion, according to the Aite Group.
Wall Street giants are nevertheless aware of the potential risk and are employing different strategies to face the robo-threat.
Some firms have accepted the challenge and have invested in building similar tools. Charles Schwab is developing its own platform, Schwab Intelligent Portfolios, and Vanguard is working on a similar proposition.
Other financial institutions have decided to back robo-advisers. Citigroup's Citi Ventures has invested in Betterment while JP Morgan Chase and Goldman Sachs have invested their cash in Motif.
Alternative strategies were adopted by Fidelity, which decided to directly partner up with Betterment, and Bank of America Merril Lynch, which has geared its advisers with more advanced technology tools - Merril Clear, an iPad app - to better serve their customers.
Automation in Australia
Meanwhile, in Australia, a recent government report found that 42 per cent of Australians never used a financial planner and among their top pain points was the prohibitive costs.
Consumers would therefore be at least intrigued by the possibility of cheaper financial advice but there are not yet many propositions in the market, and the available ones are still in their infancy.
InvestSmart has launched a robo-advice service hoping to tap into its website audience, while StockSpot only launched last year and has recently increased its zero-fee threshold to AU$10,000, with no management fees for the first 12 months.
Thanks to an increasing focus on innovation in the fintech space and with growing funds available to start-ups, current solutions will improve and new ones will enter the market.
Most of Australia's largest financial institutions seem to have an interest in being an active part of the growing start-up environment.
Westpac and St George are providing direct funding and support to innovative ideas; ANZ and AMP are amongst the main partners of a new fintech-focused start-up space in Sydney; and CBA has its own Innovation Lab.
The threat to financial planners
The growing interest in robo-advice is also demonstrated by the fact that the Financial Planning Association has raised concerns about the regulation of robo-advisers in a recent submission to Treasury, claiming that automating the investment process could pose risks for consumers.
Financial planners are also worried that these solutions could broaden their reach and not only target young, early adopters.
In fact, the Automated Investment Advisers Global Market Review found that robo-advisers appeal not only to their natural younger audience - technology-savvy and with smaller investment capital - but also to more sophisticated investors aged 60 and over, attracted by the opportunity for greater transparency, more control and lower fees.
The robo-advice revolution in Australia is still in its early stages and only time will tell if a small start-up or a large financial institution will launch the platform that will receive enough interest to gain noticeable market share and take on the players from overseas that are targeting Australia.
Acorns, which also automatically rounds up everyday purchases and adds spare change to users' investment portfolios, just announced that they will be soon launching Down Under, supported by more than US$30 million in funding and having secured for their advisory team legendary economist Harry Markowitz, Nobel prize winner and the father of Modern Portfolio Theory.
The robo-advice market in Australia looks incredibly promising, with a need from consumers for more accessible solutions, increasing local focus and investments in the fintech space and the attention of big players coming from abroad.
The race to manage Australians' savings is on and it looks like everyone wants a piece of it.
Giovanni Ravone is a fintech M&A analyst at Rubik Financial.
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