Innovations in Identity

Are Robo-Advisers the Future of Investment Management?

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Fintech is changing the way that we look at money. How we pay, how we bank, and how we send and borrow money have all been disrupted by fintech. What about investments? What influence has fintech had on investing and asset management?

In recent years, automated online wealth advisors, also known as “Robo-advisers” have taken the investing world by storm. Robo-advisers rely on sophisticated software using algorithms to provide automated investment portfolio management advice with little or no human intervention. Instead of selecting mutual funds or specific stocks, most robo-advisers assess a customer’s risk based on a questionnaire and then assign a set of exchange-traded funds (ETFs) that track stock indexes.

A report from Bloomberg revealed that the use of robo-advisers sharply rose by 210 percent in 2015. While the amount that was invested using automated portfolios is still relatively low – $50 billion out of the total $20 trillion wealth management market was managed by robo-advisers – the significant growth in adoption cannot be ignored.

Why Investors Go Robo 

When robo-advisers were first making headlines in mainstream publications in 2014, the common perception was that millennials and small investors were the key market segments driving user adoption. Two years later, this is no longer the case. At investment firm Charles Schwab, 15 percent of investors using robo-advisers have at least $1 million invested in their portfolios.

What is behind this trend of upward growth in the number of people using robo-advisers? As with many fintech innovations, cost savings is a major consideration. When using an automated investment service, fees are considerably lower compared to traditional investing with a real human investment adviser. Fees for using a robo-adviser are typically less than half of what is charged by traditional brokerage firms. In addition, robo-advisers accept lower account minimums, making them more appealing to a wider audience.

Reaction from Traditional Investment Advisers

Without a doubt, traditional investment firms are certainly under considerable pressure to justify their higher fees in the face of increasing competition from robo-advisers. As more investors take the robo plunge and move their money into automated portfolios, mainstream banks and brokerages must choose whether or not to embrace the technology.

The world’s largest mutual fund company, Vanguard, with $3 trillion in assets under management, launched its answer to robo-adviser fintech startups in 2015 after beginning a pilot in 2013. Its service combines both robo-advisers and human wealth managers to provide the efficiency of software algorithms along with a human touch. The minimum investment amount is $50,000.

Charles Schwab, managing $2.46 trillion in assets, also launched into the robo-adviser space with its own service in 2015. Unlike Vanguard, Schwab’s offering is a fully automated service and the minimum amount to invest is $5,000, making it more appealing to smaller investors. Although portfolios are automatically managed, customers still have access to human investment professionals to answer any questions.

Other recognized U.S. firms are also getting on board. Morgan Stanley and Merrill Lynch are both believed to be developing their own robo-adviser platforms, with the former having hired away one of the chief automation engineers from Schwab. 

In Canada, major banks are also getting into the game. Bank of Montreal (BMO) introduced its SmartFolio service in January 2016. Similar to Vanguard, SmartFolio is a hybrid of both technology and human management. Customers are asked a series of questions in order to build an investor profile and an ETF portfolio is created based on the responses. BMO still uses traditional portfolio managers to actively manage and rebalance investments as needed to keep them in line with customers’ objectives.

Not to be outdone, some of the largest banks in the UK are also working on their own robo-adviser services. The Financial Times reported that Barclays, Royal Bank of Scotland, Lloyds, and Santander UK have been working on building online sites to provide investment advice. Several large robo-adviser platforms also launched in the country in 2015.

Who Robo-Advisers Are Targeting

As mentioned earlier in this article, millennials and small investors have been the primary focus of fintech startups offering robo-adviser investment services for several years. However, as both the market and technology mature, we are beginning to see a change in demographics.

Now that more baby boomers are heading into retirement, this generation is a key market segment for digital investment services as they seek to access their retirement savings using mobile devices. A report released in 2015 revealed that baby boomers are now the biggest generational client base for investment services followed by their children, the millennials.

For U.S. robo-advisers like Wealthfront and Betterment and Canadian contenders such as Wealthsimple and Wealthbar, the future looks positive. A.T. Kearney, a consulting firm, has projected that the total amount of assets managed in the U.S. by robo-advisers will see annual growth of 68 percent over five years, climbing from $300 billion in 2016 to nearly $2.2 trillion in 2020.

Even Robo-Advisers Need KYC

In some jurisdictions, robo-adviser services are still subject to the same regulatory requirements to carry out know your customer (KYC) due diligence as traditional investment management firms. The Canadian Securities Administrators (CSA), an informal body consisting of all securities regulators in Canada, issued a staff notice in September 2015. This document served as a reminder that robo-adivsers operating in Canada are still subject to the same KYC requirements as portfolio managers that do not operate online. The same is true in the U.S., where robo-adviser platforms are required to register as investment advisers with the Securities and Exchange Commission (SEC).

Savvy investors always look for the best value. This approach applies equally when it comes to choosing an investment adviser. Fully automated or hybrid portfolio management services are gaining traction, and it is clear that as more investment firms look for ways to remain competitive, robo-advisers in some shape or form are here to stay.

In your opinion, which country is leading robo-adviser innovation?

Disclaimer: Trulioo provides no warranty that the information contained in this document is accurate, up to date or complete and in no circumstance does such information constitute legal advice. Any person who intends to rely upon or use the information contained herein in any way is solely responsible for independently verifying the information and obtaining independent expert advice if required.

2 Comments
  • Debra Thuet

    Don’t forget to keep an eye on us as we are watching you!

    November 22, 2016 at 8:41 am Reply
  • Clark Kendall

    While there maybe financial advantages to robo-advisers for the lay user. When you need a human to show any type of emotion or personal experience from investing and other stories from other investors that work with them it’s not possible with a machine. I don’t believe that a machine can ever replace the value of working with an honest reliable person.

    September 25, 2018 at 11:46 am Reply
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