Is the future of wealth management going to be robo-advisers?


A new Deloitte report suggests that there is an ‘advice gap’ for five million people in the UK and that this could be filled by cheaper, automated online services.

A robot sitting at a deskThroughout 2015 we saw a focus on the use of robotics in the finance industry, albeit with conflicting points of view from some of the contributors here at diginomica.

Some argued that reducing human intervention in favour of automated processes is a bad idea, whilst others suggested that automation could help reduce risk.

Whatever your view point, it’s hard to deny that the use of robotics, automation and algorithms for financial management and/or transactions is of huge interest to the sector.

And it seems that Deloitte agrees, having released a report that suggests that the use of ‘robo-advisers’ could help plug an advice gap in the UK. The advice gap being up to five million people that wouldn’t pay for specialist one-on-one advice from a wealth management firm, but may pay a small fee for an automated online service.

Andrew Power, investment management partner at Deloitte, said:

Robo-advice can dramatically reduce the cost to the consumer, potentially to £100 per transaction. It will take a number of years to attract people who fall in the advice gap until they develop trust in a ‘machine’ solution and are encouraged to engage more proactively in financial decisions.

In the short term, the quickest take-up will be among the two million ‘tech savvy savers’, or people who take an internet-based DIY approach to research savings plans. As 50% of these savers seek financial advice on choosing savings products, we think one million people could easily use robo-advice. Over time, we think robo-advisers could theoretically close most of the advice gap.

Deloitte said that whilst in the UK robo-advisers currently only cover less than £1 billion assets under management, the US robo-advisory market handled $19 billion AUM in 2014 (a growth of 65% from the previous eight months).

The report notes, however, that the leading robo-advisor firms are still trivial compared to the $25+ trillion retail investable assets in the US. But given that large wealth management firms, such as Charles Schwab and Vanguard, are investing in robo-advice, it’s evident that the incumbents are concerned.

Deloitte’s Andrew Power added:

The UK is well-placed to use robo-advisers, given the high take-up of other online services. For example, in general insurance, nearly three-fifths of people use price comparison websites to research and buy their insurance policies. This is only going to increase, as technology develops, people become more comfortable using it and more companies turn to digital platforms. For wealth managers, robo-advice technology could mean people have access to a broader range of advice that is personalised and at a lower cost.

Why the disruption?

Deloitte outlines five reasons why it thinks that the wealth management market is ripe for robotics disruption. It said:

  1. Robotics allows for significantly lower fees, when compared to traditional advisors. This is particularly true for what Deloitte describes as ‘mass-market consumers’ (assets <$200k) to get advice that’s tailored to their needs.
  2. Robotics and automated online services play into digitally savvy people’s needs/wants. To some, having a meeting with someone to discuss your assets in three weeks time may seem rather archaic compared to getting advice online anytime you want it.
  3. Many leading wealth-management firms are already working on incorporating robo-advice capabilities into their existing offerings.
  4. Wealth management firms have been investing heavily in big data and analytics, which Deloitte thinks may allow for more personalised and tailored digital advice over time.
  5. Technology has lowered the barriers to entry for new firms to break into wealth management.

The burning question

If this is a real threat to the way that wealth has traditionally been managed in the past, what should the incumbent wealth management firms do about it?

Deloitte has some advice and rightly differentiates between those firms that serve the very affluent client base and those that serve the lower ends of the market. The report states:

Some firms will choose to ignore the opportunity that robo-advice presents for now. This may be the right decision in the short-term for wealth management firms that serve a high net worth client base that can afford person-to-person advice and have more complex financial and planning needs. These firms can take the opportunity to tread slower and more cautiously, as robo-advice may not be as necessary for them in the immediate future, until their client base evolves.

However, wealth management firms that serve a massmarket and mass affluent client base are often inherently more vulnerable to this disruption and should face up to it. Firms that target these markets and do not offer a channel for digital, automated advice will likely need to embrace digital strategies and tools to help maintain competitive advantage in this new market environment.

Deloitte suggests that firms looking to branch into this area have three options: to partner, to develop and in-house solution or to acquire.

Partnering obviously allows a company to move fairly quickly and will likely come with lower costs, but also could mean differing priorities down the line and potential conflicts of interest. Building an in-house solution comes with risks (will it be better than the market offerings?) and requires skills to be in-sourced, but it may also allow a firm to ‘own’ its competitive advantage. Finally, acquisition can also allow for a speedy route to market, but integration has proven tricky many times in the past.

The report finishes by saying:

Digital, automated advice will likely become a standard expectation for the mass-affluent and mass-market segments. But we have seen only the beginning of what automated advice can become. Big data and advanced analytics have the potential to broaden the scope of roboadvice
dramatically, incorporating financial planning into broader retirement, health, and wellbeing, and enabling quasi institutional research. Robo-advice could then impact all investor segments, not just the mass-market and mass affluent retail investors.

Robo-advice is here to stay and poised to evolve into much more disruptive and wide-ranging robotforms of advice. All wealth management firms should take notice.

My take

My view is that there will always be a market for one-to-one, human-based wealth management advice. It’s likely to be for the very wealthy and it’s likely to remain expensive. However, even this could be integrated with robotic/automated/online services. Either as a tool for advisors or as a complementary service.

But at the lower end of the market this is a no-brainer – if these systems can successfully be developed. Even the most successful online, consumer based advice systems have their flaws and if you know what you’re doing manual intervention can lead to better results.

Execution will be key.