Robo advisors have been floated as a game changer for the wealth management industry over much of the last five years, and it seems they are on the cusp of reaching their potential. Consulting firm A.T. Kearney has predicted an increase in the amount of assets managed by robo advisors of 68% a year over the next four years, reaching $2.2 trillion by 2020.
The algorithms that enable automation for financial advice have already been around for a while. Low fees and ease of use have already seen them attract some $50 billion in assets in the US, though, obviously, given that there is over $130 trillion in assets currently under management globally, this is still a tiny slice of the market, leaving massive room for growth.
In spite of this, numerous surveys suggest that financial advisors appear to be underestimating the impact AI-driven algorithms will have on the industry, with many expressing a lack of concern.
There are a number of reasons offered for this, with the lack of ‘personal touch’ being the most oft-cited. However, this is an issue easily compensated for by the massive price reductions. The cause for this apparent mass delusion could be down to a lack of understanding of the role that robo-advisors will come to play in the industry, or it could just be wishful thinking, but they are going to have to adapt quickly or they risk being rendered utterly redundant in the order.
Many are already planning. Michael Cyprys, an equity analyst at Morgan Stanley, recently wrote in a report on the subject that, ‘[The] rising threat from robo-advice leads Financial Advisor’s role to evolve: greater focus on financial planning, embracing digital tools such as Robos as a means to become more efficient; pairing human and machine. Digital capabilities become increasingly more important as Millennials are more digital savvy than previous generations which is transforming the investment and wealth management landscape; innovative new entrants such as Robos could take share.’
It certainly seems like governments are already on board too. The low fees make robo advisors perfect for investors working with a smaller budget, and a consultation last year conducted by the UK Treasury and the Financial Conduct Authority (FCA) expressed a belief that it could fill the UK’s so-called advice gap, providing affordable financial guidance to the large majority of Britons lacking the necessary funds to pay thousands in fees.
However, it could well be that financial advisors wishful thinking is not as misplaced as it may seem. SCM Direct researched 10 UK ‘robo-advisors’, and found their average fee excluding VAT for a £25,000 portfolio, was 0.59% pa i.e. £147.50 per annum. SCM Direct calculates that it would take nearly 11 years for robo advisors to make a profit, citing one UK robo advisor startup in an article by Citywire who said, ‘I wouldn’t expect to be reaching breakeven before we have £2 billion AUM,’… We’re talking about several years, maybe five or six.’ Obviously SCM Direct is an investment manager, so they clearly have a dog in the race. If true that they are purposefully playing down the idea, it would be a tremendous act of self sabotage, but there are other problems. The Securities and Exchange Commission still says there are unanswered questions, and that it needs to look harder before making recommendations for investing with robo advisors to ensure they have the ability to put the needs of the investor first.
Whatever the problems, it is likely that they will be overcome within the next decade. Robo advisors are going to increase their market share, and wealth managers need to have at least some contingency plan in place, even if they do truly doubt their potential.