S 12 - Robo - Advising
S 12 - Robo - Advising
B B Chakrabarti
Professor of Finance
Wealth Management
• Wealth management is an advanced type of financial
planning that provides HNWI and their families with private
banking, asset management, investment management,
estate planning and legal resources with the goal of
sustaining and growing long-term wealth.
• Money, Portfolio and Wealth Managers
• Money managers make decisions regarding the selection of
individual bonds and/or stocks in a single asset class.
• Asset or Portfolio managers focus on multiple asset class
portfolios.
• Wealth managers’ focus is the client. His efforts are
devoted to helping clients achieve life goals through proper
management of their financial resources.
• Example:
Microsoft Excel
97-2003 Worksheet
Impact of Fintech on Wealth Management
• Information need for existing and new clients - Fintech can
provide real-time data, news and analytics, market
intelligence, product and service development, client
communications and performance monitoring.
• Providers are designing tablet apps to support relationship
managers in client meetings by guiding them through a smart,
adaptive and interactive sales process, consolidating all
relevant sales functionalities in a single platform.
• Client onboarding - Currently tedious and frustrating
experience for clients due to risk-related questions and
repeated conversations for setting up an account. Fintech can
solve these issues by using customer and behavioral data and
gamification techniques to automatically identify risk profile,
loss acceptance levels etc.
Impact of Fintech on Wealth Management
• A wealth manager in Liechtenstein has launched a service that
allows clients to open accounts using video conferencing.
Other wealth managers are following suit and digitizing the
onboarding process using innovative technology, from
electronic signatures and online ID verification to biometric
authentication.
• Investment advice and distribution - Smart algorithms can
be used to support life-stage planning, automated transaction
advice, investment strategies, tax planning, estate planning
etc.
• Wealth manager are introducing a suite of digital banking
tools for tablets and smartphones. The app provides
personalized content, trading tools and opportunities for
multichannel collaboration.
Impact of Fintech on Wealth Management
• Investment management – Fintech can speed up decision-
making, rebalancing and monitoring processes, asset
selection, settlement etc.
• A number of wealth managers are building digital solutions
that provide social marketplaces where customers can trade
stocks and funds online.
• Roboadvisors focus on passive investment strategies, rather
than discretionary decisions. As a result, there is less, if any,
need for a human portfolio manager.
• Account administration – Fintech can automate account
maintenance, self service, 24/7 support and multi-channel
interactions.
Fintech - Wealth Management Business Model
• One of the more popular wealth management fintech
business models is automated wealth managers (robo-
advisors) that provide financial advice for a fraction of the
price of a real-life adviser. These robo-advisors use algorithms
to suggest a mix of assets to invest in based on a customer’s
investment preferences and characteristics.
• This business model benefits from changing demographics
and consumer behaviour that favour automated and passive
investment strategies, a simple and transparent fee structure,
and attractive unit economics that allow low or no investment
minimums.
• Examples: Betterment, Wealthfront, Motif, Folio.
New Digital Client
• Preferences of new digital clients:
a) Engagement: Clients value accurate information, self-
service and digital channel capabilities.
b) Trust: Clients value transparency in fees, transaction
security and data confidentiality the most.
c) Performance: As regards financial performance, they value
a solid understanding of their financial goals and having at
their disposal a broad array of products and tools.
• Most clients are familiar with robo advice offerings.
• Younger generations are more likely to consider robo-
offerings than older age groups.
What is Robo Advisor?
• Robo-advisors are digital platforms that provide automated,
algorithm-driven financial planning services with little to no
human supervision. A typical Robo-advisor collects
information from clients about their financial situation and
future goals through an online survey and then uses the data
to offer advice and automatically invest client assets.
• Robo-advisor platforms offer retail investors low-cost access
to professional investment management, a convenient self-
service user interface.
• The expectation is that these platforms will grow and develop
in line with various client-segment requirements, but robo-
advisory platforms are still climbing a public-awareness curve.
Robo Advisor Technology – Front, Middle and
Back Office?
Robo- vs Human Advisor
Robo-Advisor Human-Advisor
Fees 0.2% - 1% of total invested per year 2% - 3% of total invested per year
• Manages investments • Manages investments
• Usually put your investment money • More specialized services (Eg. Tax
into a basket of Exchange Traded advice, Estate planning)
Funds (ETFs). Some of these ETFs • Provides more tailored,
are not available to retail investors. specialized experience.
Services • They are great at using algorithms • If you want an advisor to be able
to automatically buy and sell assets, to diagnose your personal financial
rebalancing your portfolio over time problems and opportunities for
rather than trying to beat the improvement and not just
market. something for the masses, this may
be a better option.
• Experienced investors with more
• Beginners assets
Good for • Less complicated investments • More complicated investments
• "Lazy" Investors • Prefer flexibility and control of
investments
Robo Advisor vs Do It Yourself vs
Human Advisor
Do It Yourself Robo-Advisor Human-Advisor
Minimum
Low Low High
Investment
Time and
High Low Low
Research
Robo Advisor - Pros
• 1) Low Fees: Prior to the introduction of the robo-advisor
platforms, investors were lucky to receive professionally
managed investment assistance for less than 1.0% of assets
under management (AUM). The robos have significantly
changed that paradigm.
• 2) Nobel Prize-Winning Algorithms: Betterment and many of
the robo-advisor’s algorithms rely on Nobel Prize-winning
investment theory to drive their models.
• 3) Access to Robo-Advisor Services Through a Financial
Advisor: It’s becoming more common for traditional financial
planning practices to ‘white label’ robo-advisors’ platforms for
their clients. This takes out of their hands the cumbersome
task of choosing assets, so that the financial advisor may
spend more time with their clients addressing individual tax,
estate, and financial planning issues.
Robo Advisor - Pros
• 4) Expanding the Market for Financial Advice: Some
consumers, younger investors or those with lower net worth,
may not have considered professional financial advice.
• 5) Robo-advisors Aren’t One-Size Fits All: There are low-fee
robo-advisors for different types of clients.
• 6) Low Minimum Balances: It’s a boon for investors with a
small net worth to get professional robo-advisory
management. Zero minimum balance technology enhanced
robo-advisors’ role and attracted many young and low net
worth clients.
Robo Advisor - Cons
• 1) They Aren’t Personalized: You’re more than just an investment
portfolio. You have many goals, both for the near and long-term.
While many robo-advisors now allow you to set and edit your goals
using their financial planning software, you also have money-
related issues and concerns which may benefit from a chat with a
human being.
• Most (although not all) robo-advisors will not hold your hand and
talk you off the ledge after a significant market drop. The
human financial advisor is there to assuage your fears and explain
how the investment markets work. A financial planner works to
integrate your finances, taxes and estate plans. The advisor’s office
may have a diverse pool of advisors to help with many aspects of
life beyond just ‘money' concerns.
• If you want to sell call options on an existing portfolio or buy
individual stocks, most robo-advisors won’t be able to help you.
There are sound investment strategies that go beyond an investing
algorithm. Sophisticated and newbie investors may want a broader
investment portfolio with a wider range of asset classes than the
typical robo-advisor offers.
Robo Advisor - Cons
• 2) They Falsely Bash Advisors’ Price Schedules: It’s true that most
robo-advisors have low price schedules, but not all. It’s not true
that all financial advisors are expensive. There are financial advisors
who charge approximately 1.0% of assets under
management (AUM) for their services. This fee is comparable to
several robo-advisors.
• 3) They Falsely Claim They're the Only Resource for the Little ‘Guy
or Gal’: There are financial-advisor alternatives for those without
big money or those just starting out. The XY Planning Network
(https://www.xyplanningnetwork.com/) is a fee-only financial
planning collection of advisors with an affordable monthly fee
structure. The XY Planning Network advisors also cater to a younger
clientele.
• 4) No Face-to-Face Meetings: If you’re someone that wants a
relationship with your financial advisor, then most robo-advisors
aren’t for you. The robos don’t have an office where a client walks
in and talks directly to an advisor. This type of personal contact is
relegated to the traditional financial advisory models.
Top Five US Robo Advisors
Robo Advisor AUM ($bn) Annual Equity Ann.
Advisory Fee Return
Vanguard 140 0.30% 8.46