Author: Valuefy

Are human advisors being edged out by the Robo Advisory revolution? That is the question that’s troubling the wealth management industry moving into 2019. The future of wealth management seems to be in a state of flux, human advisors are apprehensive about the developments in Robo advisory, they aren’t sure whether Robo advisors are here to help them, supplement them or replace them entirely.

The answers aren’t clear at this point, however, Roboadvisory is forcing the industry to take notice and modernize to stay relevant. Roboadvisory is taking the wealth management space by storm, catering to millennials, these firms are mobile first, customer friendly, and transparent. They are a vast improvement on the opaque and inaccessible fashion in which traditional wealth management firms operate.

Millennial investors are curious about how their money is being invested, and Roboadvisory is helping them gain control and confidence over their finances. Investors are increasingly choosing Robo advisors as they are more accessible (Most platforms have web and mobile apps), more streamlined, and offer more value, especially to those with uncomplicated financial goals and needs.

What does this mean for traditional wealth management firms?

Traditional wealth management firms need to embrace the changes that are taking hold of the industry and adapt if they want to survive. Artificial Intelligence is helping temper the decision-making process, helping investors derisk their investment strategy in favour of a more holistic and data-driven approach. AI insights that are culled out from terabytes of data can help both professional advisors as well as laymen investors, make better decisions.

It may not be the solution for investors with complex needs and larger estates, but it can help those who cannot afford the high fees charged by traditional wealth management firms (around 1%-2% of AUM). Also, the low minimum asset requirements on Roboadvisory platforms (around $1000 – $10,000) as compared to high requirements of traditional firms ($100,000) make Robo platforms a lucrative option for beginners.

Robo-advisory in their current form is catering largely to DIY investors and supplementing traditional advisors, leading to a High Touch approach (Mix of tech and human advisory). Adaptable wealth management firms stand to benefit from this expansion of their customer universe, they can bolster their bottom line from being able to serve both small-scale investors as well as High Networth Individuals with complicated investment goals.

Integrating Roboadvisory into their roster of services is helping banks and wealth management firms free up valuable advisor time. Advisor portals and apps are helping clients gain more transparency on the state of their portfolios, in turn helping clients and human advisors have more insightful conversations about financial goals and strategies.

An ecosystem where Roboadvisory platforms and Human advisors coexist will inspire an ecosystem of trust and collaboration by reducing information asymmetry that plagues traditional investing. Investors across the board will benefit from being able to monitor and assess the state of their own finances in real time.

The human touch can never be eliminated as algorithms cannot assuage investor’s fears or offer solutions for complex needs such as succession/estate planning, elder care, tax and healthcare planning. However, technology can help automate and streamline a large portion of conventional financial planning, helping human advisors focus on complex, unique challenges posed by individual portfolios and leaving the humdrum of financial planning to Robo-advisors.

As the adage goes, the best time to start investing is yesterday, the second best time is now. Millennials want to invest their money, however, a major roadblock that stops them is that they often consider their earnings too paltry to start investing. This feeling may often last till their late 30s or 40s until they start making reasonable incomes, the kind that the baby boomers were making in their early 20s.

Most traditional advisors have minimum asset requirements which are quite steep such as assets of $500,000 or more which puts them out of reach for the average Millennial. Traditional advisors also charge sizeable commissions, on average of 1% to 2% of assets under management. In such a scenario, Millennials are wary of traditional advisors as they have to beat the market by a large margin to even cover the high cost of commision and create any value.

Added to this, millennials also tend to have a heightened mistrust of financial institutions. This is due to the fact that most millennials grew up and had their most formative years during the great depression. The combination of these factors makes millennials hesitant to adhere to ‘status quo’ investment patterns, instead, they prefer to put their trust in tech-driven or DIY solutions.

The paradigm shift: from trusting people to trusting Artificial Intelligence

The biggest challenge in DIY investing is often getting started, what information to consume, what to disregard, and what to act on. The entire process gets a bit overwhelming as there’s information overload on the internet which tends to cripple modern-day investors.

Established news sites like Moneycontrol, Bloomberg, Economic Times, Financial times are all fine sources for investment advice, however, for a beginner investor, it can be a nightmare to track and monitor the news constantly and connect the right dots. Gathering the right inferences from a glut of data is what makes DIY investing so challenging.

Artificial intelligence based solutions offered by Robo advisors can help solve this problem, by creating curated and actionable advice according to goals set by investors. AI can churn through Terabytes of data, study market trends, make analyses and projections and give out predictions that minimize risks involved in DIY investing. The technology may seem complicated, but the end user benefits as they only have to act on ‘actionable advice’ while all the complicated algorithms do the number crunching for them.

Robo-advisors chart the best course of action by analyzing goals, risk tolerance, and investment preferences. Investors can monitor the entire process through simplified dashboards that offer different levels of granularity. Most Robo-advisors are clear and transparent and often intuitive to modern day users who use apps for everything from ordering food, getting around town, and even dating.

Why Robo-advisors? – Convenient, low fees and DIY

The interest in Robo-advisors as an ideal solution for millennial investors is being spurred by increased transparency, accessibility, low fees and best in class customer experience offered by them as opposed to traditional advisors. The ability to invest via apps on their phone or on the web has led to another spurt in the growth the category.

Most Robo-advisors charge up to 0.50% of total assets under management with most advisors offering free services until $5000 or $10,000, depending on their target audience. They also hold off on charging account-opening fees, withdrawal or account-closing fees, trading/commission fees, or account transfer fees and stick to clear and simple management fees to appeal to millennials.

Is a Robo advisor the right fit for you?

If you are just getting started in investing and want to dabble in the markets yourself while still minimizing risks, Robo-advisors are your best bet. Their simplified user experience can help you monitor your finances on the go, eventually developing a taste for investments. Robo-advisors can help you temper your instincts and make better decisions, all without incurring the costs and inconveniences that come with a traditional human advisor. Even experienced investors are choosing to go the Robo route and transition from expensive actively managed accounts to low-cost automated alternatives.

Robo advisory, however, is not a one size fits all solution. There needs to be careful consideration of one’s financial goals before settling on one. If you have a large and complicated estate, or you’re invested into many different types of assets a human touch may be necessary. They may also not be the right fit if you have specific needs that don’t fit traditional models such as succession planning, multi-currency portfolios etc.

However, these aren’t really the target audience for Roboadvisors. If you have a fairly simple and more straightforward portfolio and you just want to get started, then Robo-advisors are the perfect starting point for your investing journey.

Millennials are markedly different in their approach to investing than Baby boomers (Generation X), for one, they grew up and lived their most impressionable years during the great depression and saw the brunt of the housing crisis at its peak. They have also lived through the dot-com bubble and many see the markets as rigged in favour of the big guns.

This created an inherent fear of the stock market in the entire generation. So much so, that they are wary of the traders or investment bankers and see them largely as snake oil salesmen. However, on the flip side, this skepticism and pessimism about the market make them cautious investors. Most millennials are very wary of where they invest their money, hence, they tend to do a lot more research, online and vet any opportunity thoroughly before investing.

The Millennial mindset: Investing with a heart

This tendency of millennials to do their own research about companies also means that they actively seek out companies that reflect their core values. Whether it is being environmentally conscious or ethically sourced, the investor of today cares about putting their money where their heart is. Cutting corners or unethical labour practices can be a death knell in today’s stock market as Millennials care deeply, more than any previous generation, about sustainability and a company’s moral compass. The massive success of Nike’s Colin Kaepernick campaign is evidence of this investing mindset. Although controversial, the campaign that stood in support of the #BlackLivesMatter campaign led to a surge in online sales by almost 31%, mostly driven by Millennials. This despite the backlash by the ‘baby boomer’ generation and by president Trump himself.

Tools for the Millennial investor: Simplified investing with complete transparency

This approach of being ‘invested’ in ‘investing’ means that Millennials are looking for more DIY platforms to investing and more transparency at every stage of the process. They prefer to do their own research and are often on the lookout for tech that makes their lives easier. New age investing platforms are doing just that, providing investors with the tech they need to get started while keeping it simple and user-friendly. Similar to any other choice that they make, millennials care about customer convenience. Similar to an Uber, Venmo, Tinder or any other service that they use, Millennials love services that enable them at the click of a button. Investment platforms are adapting to this by focusing on user experience and convenience for the investor. They are focusing on building solutions also help automate the tedious research that goes into investing and helping create savvy Millennial investors. The investment platforms that will come out on top are those that successfully use tech to simplify the steep learning curve that comes with investing.

Every penny counts: Advanced analytics and tracking for the inquisitive investor

Another defining characteristic of the generation is that they are often burdened with student debt, as well as lower incomes, uncertain futures, and less job security than the baby boomers. In such a scenario, they care more about where every penny is being spent and are less likely to ‘trust’ their Wealth advisors. Wealth management firms have to adapt to this trend by justifying every investing decision or recommendation with hard data and analytics. Platforms like WealthFy that allow for detailed reporting, analytics, portfolio attribution and monitoring will help new investors feel at ease. AI enabled Robo advisory is another major driving force in helping temper ‘gut based’ investing, helping assuage concerns for Millennials who often have a diminished risk appetite.

The Wealth management firm that serves their users with a dedicated and high-quality app along with exceptional customer service is likely to have the edge in landing a Millennial client. Failure to adapt to the shifting paradigms will eventually lead to many of the laggard firms being phased out to be replaced by ‘tech enabled’ firms or by DIY investing platforms.

The relationship between Wealth advisors and their clients is similar to that of a parent and a child. The client (read child) in this relationship is always tempted by the lure of quick returns and a focus on immediate expectations.

It may be the latest Crypto investment that catches the client’s fancy, or a new mutual fund with very high returns in the last year, or even a stock tip suggested by a peer. However, the advisor (parent) has to step in as the voice of reason at such times. The advisor has to help them meet their long-term financial goals while still giving them adequate short-term returns to keep them invested.

Advisors face a three-pronged dilemma when it comes to clients: Knowledge, Time Allocation and Willpower. The advisor of today is capitalizing on technology and turning to investment platforms equipped with advanced analytics and advisory to overcome them.

Knowledge dilemma:

The advisor is always caught between relaying all of the information to the investor or simplifying it and on a need to know basis. It may seem judicious to tell the investor every small detail, however, such an information overload may often lead to choice paralysis.

 Solution: Strong user experience and data visualization

Investment platforms of today are equipped with user-friendly interfaces and data visualizations. This helps break down and convey complex data in simple charts and graphs that can be easily digested by the investor.

Time allocation dilemma:

In the case of most wealth management firms, the most precious resource is advisor time. A single advisor may be handling up to 20-30 client portfolios in a single year. An advisor has to divide his schedule in a way that every investor gets a fair share of their time. Often advisors have to spend so much time researching and getting up to speed on a customer portfolio before a call/meeting that valuable hours are wasted in preparation rather than customer service.

Solution: Automation of the monitoring and review process

Advisors are now choosing to spend time onboarding a customer onto an investment platform so that investors can monitor and review their portfolio at any time by logging into the system. New age investment platforms equipped with Robo advisory and detailed analytics can help advisors automate most of the research that goes into investing, saving valuable advisor time. These platforms also may have simplified app versions, that can be accessed on the go, so that the advisor can be on top of things 24×7.

Willpower dilemma:

An advisor is only human, in many cases, they might find themselves emotionally attached to a certain fund or scheme. This might be because they have got them attractive returns in the past or because of some underlying bias towards a brand. In such cases, it is hard to be objective even when the scheme is underperforming and it tests the willpower of the advisor.

Solution: Strong decision architecture with Robo advisory

Robo advisors help temper the gut instinct of a human advisor with insights and recommendations powered by data. Advisors are often blinded by bias and refuse to make tough decisions such as dropping a fund or booking a loss. The investment platforms of today simplify their detailed analytics into actionable insights and recommendations, helping advisors overcome their blind spots and rebalance their portfolio to chart their course to safer waters.

The mutual benefits for investors and advisors

Adoption of ‘Investment platforms’ by Wealth management firms gives advisors the ability to focus on customer service and ensures that investors have complete transparency on their portfolio.

There is a slow yet steady push towards leveraging Analytics and AI in the space. Indian investors are picking up on global cues to demand world-class technology from their wealth advisors.

Although the ‘investment technology’ space is still nascent in the country, there are already a few emerging market pioneers. Wealthfy, the Robo advisory enabled investment platform from Valuefy was recently awarded ‘Best Wealth Management Technology Platform’ at AIWMI’s  India Wealth Awards 2018, the biggest and most prestigious showcase of excellence in the Wealth management industry. Over 30 leading institutions like Reuters, Aditya Birla Group, Kotak AMC and WGC have already adopted the platform and other Financial institutions are following suit.

Eventually, the adoption of investment platforms will become the new status quo. These platforms help make the process of investing more transparent. With the focus on simplification, rather than obfuscation, investment platforms are helping empower Indian investors and advisors alike.

The wisdom of the web: The future of wealth management is data-driven

Why should wealth management be any different? The investors of today rely on advice from a host of sources while making any financial decision. They seek advice online, through blogs, forums, news, social media, stock trading platforms and peers before any buy or sell.

People are increasingly soliciting financial advice online and are comfortable making decisionsleveraging on their digital outreach. In this landscape, it becomes essential for wealthmanagement firms to markedly differentiate themselves by providing in-depth analysis and datato back up every decision.

Information overload: The crippling effect

However, when it comes to relying on multiple sources to make a decision, there is always a crippling effect due to an overload of information. Financial advisors and Portfolio managers often suffer decision paralysis due to the overwhelming amount of information available on the internet that confuses rather than helps the reader. This often leads to a bias for inaction, rather than action.

The unlikely savior: AI-based Robo advisory

Robo advisory, financial advisory tools that leverage proprietary AI and self-learning algorithms to create customized portfolio recommendations, are becoming the preferred research and decision making platform for the tech-savvy investor.

It is a technology solution that is breaking new ground in the wealth management space as it combines the benefits of going to multiple news sites, channels, review sites, and neatly delivers it in the form of actionable advice and intelligence.

The promise of better tomorrow: Chasing the alpha