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

Cost Low Medium High

Flexibility High Low Medium

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

Charles Schwab 41 No fee 6.19

TD Ameritrade 20 0.30% 8.11

Betterment 18 0.25% 6.54

Wealthfront 15 0.25% 8.19

Vanguard 500 483 0.14% 10.27%

Index Fund
S&P 500 Index 10.42%
 Indian Robo Advisors
• In the last few years, the financial market has noticed a strong
rise in the Robo advisors in India. As a matter of fact, these
Robo advisors have broken down the traditional barrier
between financial services and the average investors.
• For a very long time, an average investor could not afford the
advisory facilities of the high-fee Dalal street advisors.
However, with the rise of Robo advisors in India, these
investors have a new alternative now.
• The biggest benefit of Robo advisors is that they deliver
services directly to the customers.
• Compared to the traditional advisors, Robo advisors offer a
low-cost alternative on their digital platforms similar services
with a fraction of cost charged earlier by eliminating the
human labor. Moreover, Robo advisors are easily available and
can provide a 24×7 support.
 Indian Robo Advisors
• Some popular Robo advisors in India are:
• FundsIndia – set up in 2009 in Chennai. 12+ lakh customers.
AUA Rs. 6,200+ crore. No fees. Provides users access to
mutual funds from leading fund houses in India, stocks from
the BSE, corporate fixed deposits and various other
investment products.
https://www.fundsindia.com/services.html
• Goalwise – set up in 2015 in Bengaluru. 25,000+ users.
Provides Mutual Fund investing service to plan and invest for
client’s financial goals, be it saving for retirement, buying a
house or just building wealth. Considers client’s age, savings,
risk profile, target amount and time horizon to generate a
personalized goal plan. https://www.goalwise.com/how-
goalwise-works
 Case – Industrialist’s Dilemma
• HBS Case: Charles Schwab Corp. in 2017 (No. SM 282)
• Questions:
a) Should Schwab take note of the disruption in the wealth
management industry?
b) Can Schwab become the disruptor?
c) Should Schwab decide to cannibalize itself to grow
through disruption?
d) Should Schwab look for growth though robo advising?
e) Who are the major threats to disruption of Schwab’s
business in 10/15 years?
Disruption for a New Business Model
 Answers to the Case Questions
a) How serious is Schwab regarding the disruption in the
wealth management industry?
• Schwab executives express doubt that a company like Amazon
or Google would have the urge to delve into a highly
regulated sector like the wealth management industry. In
China, Alibaba has moved into the financial services space
successfully and also quickly. Schwab may be overestimating
the protection that regulation offers.
• Schwab’s technology team is small, and it is acquisition
averse. How can it ensure that it is making the right products
or buying products or technologies what it needs? Schwab
believes that it did the right thing by developing its own robo-
advising technology in house. May be it could have moved
faster had it acquired a smaller startup.
 Answers to the Case Questions
b) Can Schwab become the disruptor?
• Schwab cannot become the disruptor. They did not pioneer
the robo-investing product. The company does not have
venture capital arm. Nor does it engage in any significant
acquisitions. It attributes this to regulatory oversight. Some
competitors have VC operations and also are more aggressive
about M&A. It does not seem to take seriously the idea that it
might be disrupted by tech giants like Amazon, Google or
Facebook.
c) Should Schwab decide to cannibalize itself to grow through
disruption?
• Disruptive technologies often worsen performance in the near
term, and bring to market a very different value proposition.
Typically though, these are cheaper, simpler, smaller and
more convenient.
 Answers to the Case Questions
• In fact, Schwab has moved into the robo advisory services
without any fees or commissions – a practice not followed by
its competitors.
d) Should Schwab look for growth though robo advising? How
about younger clients? Does Schwab understand the
millennials?
• Yes. Schwab needs to do that. Its client base under 40 is small.
• It is questionable if Schwab fully appreciates the shifts in the
attitudes of millennials and younger people toward issues of
money, work or property. For example, can it develop
products for a generation of people with high student debt,
no interest in owning a car, or perhaps little prospect for
buying a house?
 Answers to the Case Questions
• How might Schwab think about products that are more
appealing to younger investors?
• What should it offer? A college loan repayment product?
Some type of health insurance product? Insurance to cover
the care of aging parents? If millennials have fewer assets
than their parents, how might Schwab cater to them?
e) Who are the major threats to disruption of Schwab’s
business in 10/15 years?
• Tech giants like Amazon, Google, Facebook and smaller
Fintech upstarts who may attain the scale to challenge bigger
incumbents like Schwab.