Is automated investment advice here to stay?

Published June, 2017 |

Digital and connectivity Print

Is the ‘robo-advisor’ movement set to revolutionize how wealth management advice is provided? With the emergence of a new group of digital wealth management firms offering automated investment advice services, it’s a question that has sparked great debate within the industry.

Our Advice goes virtual report explores how new digital investment services are changing the wealth management landscape. Based on our discussions with senior executives across the industry – including traditional wealth managers and digital entrants – and the secondary market research we carried out, there were three key findings:

1. Digital entrants use a combination of simplified client experience, lower fees and increased transparency to offer automated advice direct to consumers.

These firms have created direct-to-consumer models to provide the basic elements of wealth management advice, minimizing the traditional reliance on human advisors and ultimately changing the fundamental economics and scalability of under-served segments. They have done so by combining the basic components of a wealth management offering with simple user interfaces, seamlessly integrated and automated technology, lower pricing with greater transparency and client-relevant digital content.

2. The new models have the potential to make advice for the mass market feasible.

The changes in economics and scalability enable these players to reach client segments that have traditionally been out of reach for wealth managers. The firms have made it possible to bring investment advice to the masses and unlock the large potential of those under-served segments.

3. The changes digital firms have introduced are here to stay, so traditional players need to determine if and how they want to approach them.

The current market share of these firms is marginal (concentrated mainly in the lower end of the market) and their underlying business models are still untested in down markets.

However, we believe that these firms’ steps to streamline the client online experience, provide greater transparency and improve the economics for the mass segments are irreversible. While traditional firms will continue to focus on the wealthier segments, those that also want to compete for the lower end of the market and/or improve their clients’ digital experience will need to determine if and how to adjust their offerings accordingly. All in all, this offers new opportunities for expansion, while challenging some of the aspects of the traditional advice model.

The emergence of digital entrants into the wealth management space will indeed change the industry in several ways. This will ultimately benefit new and existing investors alike by providing better and more affordable products and services through an improved client experience.