The curious case of Robo-Advisory in wealth management
At any rate, the financial industry is continuously adopting new technologies to deliver financial services in cheaper and more efficient ways. The adoption of these technologies particularly deepened after the 2007-2008 global financial crisis. In 2008, we saw an American advisory company, Betterment, usher to the world the first sight of Robo-Advisors.
Perhaps the starting point this week should be addressing the elephant in the room. Whenever the topic of Wealth Management is brought up, a lot of people conjure up images of a few well-heeled individuals. This is true to some extent because it used to be the case that only a few moneyed individuals and families had access to financial advice products. But nowadays, thanks to Private Banking, more and more clients enjoy access to Wealth Management offerings through the help of their bankers.
The field of wealth management itself is experiencing a huge transformation of operations and processes and is getting more and more digitised. Such innovation is necessitated partly by the changing needs of an increasingly demanding clientele, in part by a need for the sector to evolve. Neglecting the ongoing evolution would likely endanger the survival of many players.
At any rate, the financial industry is continuously adopting new technologies to deliver financial services in cheaper and more efficient ways. The adoption of these technologies particularly deepened after the 2007-2008 global financial crisis. In 2008, we saw an American advisory company, Betterment, usher to the world the first sight of Robo-Advisors. In simple terms, Robo stands for an automated process without the influence of a human being, utilising mathematical algorithms to support investment decisions while Advisor stands for wealth management services, in this case in an automated manner, making use of regular online or mobile channels. The Deutsche Bank Research publication titled Robo-Advice - a True Innovation in Asset Management refers to Robo-Advisory as online investment guidance and portfolio management services that are based on algorithms and models. The overarching principle is to minimise or completely eliminate human intervention and solely use computer programmes to find optimal investment strategies for clients.
How do Robo-Advisors work?
Robo-Advisors are fully automated online platforms that provide clients with digital financial advice and portfolio allocation. A typical advisory process involves three steps, namely initial investor screening, implementation of investment strategies and monitoring and evaluation. The starting point is always identification of the client’s individual investment objectives, preferences and goals.
Robo-Advisors start by defining the investment strategy of each individual guided by the assessment outputs. Robo-Advisors ask potential clients about their investment goals and their time horizon. Robo-Advisors will then offer investment strategies for a variety of goals, including retirement, saving or any other reason. The questions are complemented with objective and subjective enquiries that evaluate a client’s willingness and capacity to tolerate risk.
Benefits of using Robo-Advisors
Robo–Advisors have proven to be a cheaper alternative because they drive down costs for wealth management services. The cost of financial advice is usually lower compared to human advisory firms. Aspects such as fixed costs can be easily avoided, which is not the case with human advisors who generally need to be housed in an office. The reduction of these costs can make investing affordable for clients because the minimum investment requirement to get an investment fund going and management fees are lower.
Robo-Advisors are more accessible. Let us take our local private banking model, for instance. Banks usually have one or two Wealth Managers responsible for a client base of more than a 1 000, making seeing the Wealth Manager difficult. However, instead of setting an appointment with an advisor or attending a physical meeting, Robo-Advisors offer clients the possibility of obtaining financial advice and managing investment at any time from anywhere with Internet connection.
Reduction of human bias is extremely important in Asset Management. Human advisors can be subjective and partial to products for which they receive a commission. They have a limited capacity to monitor several assets simultaneously. Thus, by transferring the process from humans to automated algorithms, Robo-Advisors can mitigate some of these biases.
Limitations of Robo Advisors
Robo-Advisors are unable to know clients through frequent interactions in the way that human beings do, and this can lead to poor customer experience. Remember, private banking is heavily driven by relationship management where knowing and understanding the client is a fundamental rule to be met. Robo-Advisors can lead to customer disengagement due to the entire process being automated and consumers might not make an effort to understand how the service works or to even continually monitor their investments.
This is particularly prevalent when the Robo-Advisory service is offered to individuals with relatively low wealth who might not have experience with wealth products. The one-size-fits all questionnaires that are completed during the on- boarding stage might not be able to explicitly provide a complete overview of a client’s financial situation as they might be too simple and narrow. Robo Advisors might not be asking about a client’s other investments that are already in place, future expenses, potential liabilities and the client’s spouse’s financial condition
The Future of Robo-Advisors in Wealth Management
Due to their low and easy accessibility, Robo-Advisors have the potential to promote sophisticated investment practices in a population not used to having access to financial advisors. However, Robo-Advisors could particularly be attractive to certain groups such as households with relatively low incomes or younger individuals who might not invest because their investable funds are too small or they feel intimidated by human advisors. They can also help promote increased participation in capital markets. For our local market, while we are readying ourselves for these changes, regulators such as FIA, the Bank of Botswana and NBFIRA, proper regulation and supervision will be a key determinant of the success of Robo-Advisors. Policymakers would benefit from establishing good practices that guarantee that Robo-Advisors are objective and transparent and provide advice that is appropriate to clients’ needs. This change is certainly coming to us.
LinkedIn: Gomolemo Kololo Manake