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In the previous article we have seen the outline of how “Fintech” is changing the dynamics of financial services industry. In this article we will be discussing segments of Fintech in detail and we will take you through Robo Advisors and their role in the financial industry.

Robo Advisors have caught the eye of everyone in the investment industry recently. Now, if you are thinking that Robo Advisors are a kind of Robots, you are wrong. Robo Advisors are in fact investment advice platforms that manage the portfolio of investors, similar to traditional advisors. In this article, we will take you through the working of Robo Advisors and how they are helping investors in managing their portfolios and minimizing cost of investments across all the asset classes.

In What Way Robo Advisors Can Work for You?

Robo Advisors rely on algorithm-based software to allocate wealth across different asset classes. Most of the Robos passively manage the portfolios as they do not modify investment strategies frequently. They decide online the allocation of money to a particular asset class such as equity, bonds, commodity and others based on the individual investor’s age, his/her expected life span, risk tolerance report, etc. The allocation of assets is shown to the investor through Graphical User Interface (GUI) through which the investor can comprehend the asset allocation and portfolio performance. Some of the Robo Advisors in the market include Asset builder, Covestor, Financial Guard and Vanguard.

Millennials and Robo Advisors: A Perfect Match?

Financial advisors are now integrating their investment strategies with Robo Advisors to serve their clients. As Robo Advisors are meeting the needs of the investors, financial advisors are now focusing on value-added services, thereby enhancing the service for the clients. The Robo Advisors and financial advisors are likely to be a perfect blend for the current generation or the millennials as this generation is more leaned towards technology and risk taking. Going forward, we expect incremental participation of millennials across Robo Advisory services due to lower cost of investments when compared to the traditional methods. Some of the financial services firms are also offering these services to clients through custodians. For example, Fidelity Institutional has a tie-up with LearnVest for Robo Advisory services. It makes these services available to clients who use Fidelity as their custodian. This trend clearly reflects the demand for the Robo Advisory services.

What the Future Holds for Robo Advisors?

The Robo Advisors’ model is currently in the nascent stage. The main reason people are attracted to this model is that everything is transparent and automated here, right from opening an account to creating a detailed financial plan and having a creative portfolio allocation with negligible human intervention. Though it is not fully automated in some situations, investors can use web chats or any other means of communication to reach their Robo Advisors. The cost of investment associated with Robo Advisors is comparatively less than that of mutual funds and other financial advisors. For example, a traditional financial advisor charges an average fee of 1% to 1.5% on assets managed, whereas a Robo Advisor charges anywhere between 0.15% and 0.45% on total assets managed. Some of the Robo Advisors who charge these fee include Wealthfront, Betterment and Future Advisor. Investors can get high-quality financial advice irrespective of their portfolio size, and fees tend to be lower when they have more amounts to be invested or if the size of the portfolio is large, exceeding certain limit.

Ideal for Sustainable Investments

According to a survey by BI Intelligence, by 2020, Robo Advisors are expected to manage $8 trillion of assets globally. If even 25%-30% of these assets turn out to be sustainable investments, it would fetch at least $2 trillion of sustainable investments. We believe that sustainable investment is the key for both the investors as well as the business community. Sustainable investments are those that take into account political, social as well as environmental aspects while investing into a particular asset. Robo Advisors can do it easily by using modest algorithms and investing in assets based on investors’ preferences. This shows that Robo advisory services have a good opportunity when it comes to sustainable investments.

Source: BI Intelligence

Cost Associated with Robo Advisors

The cost associated with Robo advisory services is typically less than the fee charged by traditional financial advisory services. Some Robo Advisors like Wise Banyan and Schwab Intelligent do not charge fee at all if investors maintain a prescribed account balance in their account. The more the amount invested, the less the fees charged. Apart from the advisory fees, other applicable charges are trade fees, charges for add-on services or any other services like account closing, etc. This means fees can gobble up investors’ return, majorly or entirely, if investors have a portfolio with lower financial value.

Pros and Cons of Using Robo Advisors

The scope of Robo Advisors is currently confined to portfolio management services. The reason being these Robos lack the ability to provide sophisticated financial planning services – like tax planning and estate planning – which clients expect from normal financial planners. However, though currently, Robo Advisors have some limitations; they have the capacity to evolve into more digitally-savvy financial advisors as robotic investments platforms continue to advance. Industry experts believe that Robo advisors integrated with human skills can achieve excellent results in the future.

Conclusion

Robo advisors are changing the dynamics of the investment industry as investors are utilizing Robo Advisory services across their investments. However, for the further advancement of Robo Advisors, investors need to gain awareness and basic knowledge about them, thereby facilitating their use across different asset classes. Though Robo Advisors are looking to gain prominence, the role of human financial advisors is not yet diminished. This is because while some investors prefer to use Robo Advisors independently, others like to work with an advisor or seek a blend of both. Hence, we believe that integration of human financial advisors with Robo Advisors is the way forward and will create value for investors as well as the investment community.

Robo Advisors, a new reality now, will compete with traditional financial advisors for a pie of the financial advisory market. In the meanwhile, we believe that the financial planners who offer value-added services to their clients will continue to prosper but need to sharpen their strategies for investment advice. They can fight their new-age competitors by providing all the unique offerings to their clients.

Watch this space for our next write-up in the series, ‘Technology Wave across Financial Services’ where we will delve upon ‘Big data and Analytics‘ and their role in the rapidly changing financial services industry.

Stay tuned!

 

Neerav Gala, Project Manager – Financial Research
Financial Research
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