People all throughout the world are embracing the digital era. As the world gets more streamlined and easier, digitization is transforming everything from day-to-day activities to company strategy. This digitalization process can be applied to the wealth management business, which is turning to new technology like robo-advisors to improve services and attract a broader audience.
Robotic advisors are the most recent AI integration. These “robots” have the potential to alter the way you manage your money. Millennials, in particular, are increasingly using AI robots to enhance their investment returns and successfully handle a range of financial concerns.
To compete with disruptors, an increasing number of significant institutions in North America, Europe, and Asia have started their own robo-advisory services or made strategic investments. Wealth managers who do not invest in digitisation risk falling behind their competitors and losing profits and market share. In the worst-case situation, they may cease to exist entirely.
To begin with, robo-advisory first appeared in the United States in the early 2000s. Because of the cheap initial investment, low management costs, and ease of access, robo-advisory has piqued the interest of many tech-savvy small investors who would not otherwise have access to conventional financial advisers. In the United States, the notion of robo-advisory has become a popular topic. Many firms selling proprietary wealth management software sprung up quickly, but only a handful survived. Venture capitalists invested $300 million in several firms working in this field only last year.
Some of the Robo- Advisor firms that got funded in recent years are-
StashAway, an investing app, has secured a $25 million Series D round headed by Sequoia Capital India, with participation from Eight Roads Ventures and Square Peg, among others.
Indonesia’s Bibit has raised $65 million in a deal headed by Sequoia India.
Endowus, a Singaporean robo-advisor, earned $23 million SGD in a Series A round headed by Lightspeed Venture Partners and SoftBank Ventures Asia just seven months ago.
Fount, a South Korean robo-advisor, has obtained $33.4 million in a Series C investment to enhance its machine learning-based platform development.
Syfe, a Singapore-based startup, has raised $30 million in a Series B round, just nine months after its Series A.
WHAT IS ROBO-ADVISORY?
Robo-advisory is an automated investment advising platform that gives algorithm-based guidance without the need for human participation at a low cost. The advice offered through this medium is purely based on the information submitted by the customer to the system, which results in the automatic allocation of portfolios and investment suggestions.
The whole foundation of this technology is built on the idea that computers can deliver objective, competent financial advice for a fraction of the cost of human consultants. ScripBox, FundsIndia, BigDecisions, Arthayantra, MyUniverse from Aditya Birla Money, Tract & Act from ICICI Securities, and 5nance from Innovage Fintech are the only players in this industry in India at the time.
So, how do these machines’ function?
Typically, the robo adviser would collect information from consumers via online surveys about their financial condition, as well as their ambitions and investment preferences. The program will then create a list of suitable financial options based on the properly constructed algorithm.
This software can provide the following capabilities after completing this online survey:
• Taking advantage of tax losses
• Setting objectives
• Account management services
• Managing a portfolio
• Investing in assets automatically
• Identifying potential investors
• Digital guidance
A client’s portfolio is also automatically rebalanced whenever the funds are invested to align it with the desired target allocation. This tactic has also shown to be a less expensive way to invest.
Benefits of Robo advisors-
It’s critical for wealth management firms to invest in technological tools, platforms, and expertise in order to better cultivate relationships with their customers and prosper in the post-pandemic world.
Financial advisers can expect to reap the following benefits as the use of artificial intelligence (AI) in the development of Robo-Advisors grows:
1) The Digital Competitive Advantage
The wealth management sector is a fiercely competitive market, with more companies establishing themselves and implementing innovative fintech technology to keep ahead of the competition. Scaling as a new entry in the robo-advisory industry is difficult, according to some venture capitalists. In addition, the influence of digital advances on investment management solutions should not be neglected. Whether you’re targeting young or seasoned and smart investors, having conveniently accessible apps is vital. In today’s society, each service provider must provide accessibility and simplicity of use. Using robo advisers, customers may monitor their investment portfolio at any time and enter and exit positions at the press of a button.
2) Fraud Mitigation and Profile Accuracy
With machine learning and cloud-based applications like Robo-Advisors, the odds of error or departure are significantly reduced.
Machine learning can quickly create alerts and decrease fraudulent behavior by collecting and monitoring client data.
For example, fraud systems can accurately determine where a transaction went wrong if any unusual activity is noticed on the client’s mobile device.
The removal of human error and the requirement for any manual input is perhaps the most significant benefit.
3) Portfolios that have been enhanced
Based on your client’s goals and existing financial position, robo-advisors use mathematical algorithms to identify the best investment portfolio option for them. For that client, this creates a safer or more strategic portfolio alternative.
When it comes to investing prospects, it may be true that face-to-face communication is preferred. However, AI prepares the groundwork for clients, laying out all of the relevant data and considerations before they make a final decision.
This has the dual benefit of assisting you in winning your client’s trust while also improving the accuracy of their asset investments.
4) Lower Prices
The primary benefit of using Robo-Advisors from the client’s standpoint is that it is a low-cost alternative to traditional investment.
The rates and fees for Robo-Advisors are drastically reduced because to the elimination of human labor, fewer overheads, and little-to-no minimum investments necessary says many venture capitalists and investors.
According to Investopedia, financial planners typically charge a 1-2 percent fee, with a commission-based cost of up to 5%.
Using Robo-Advisors, on the other hand, usually only has a 0.2 percent to 0.5 percent impact on the client’s ROI.
VCs on Robo-advisors
After the financial crisis of 2008, the robo-adviser industry exploded, with major investment rounds for companies like Betterment, Wealthfront, and Personal Capital. However, venture investors’ interest for such investments has cooled recently, owing to a saturated market with over 200 robo-advisories in North America alone, as well as incumbents who have begun to mimic components of the robo model.
According to CB Insights, robo-advice has raised $2 billion in equity capital across 191 deals internationally since 2013. However, investment for wealth-tech businesses has suddenly halted. To demonstrate this trend, in the third quarter of 2017, investments in the area totaled $272 million, down nearly 50% from the previous quarter.
“The [robo-advice] startup window began to close a couple of years ago as some established organizations boosted their game to get into the robo market,” said John Siciliano, managing director of asset management advising and strategy lead at PwC.
According to him, legacy corporations entered the robo industry by purchasing or investing in robo-advisory startups. Invesco’s purchase of Jemstep and Northwestern Mutual’s purchase of Learnvest last year, as well as Blackrock’s purchase of Future Advisor the year before, were examples of incumbent acquisitions in recent years. As a result, the potential profitability of a robo-advisory platform is a harder sell.
What comes next?
Traditional financial planning procedures are nothing like this new type of online asset management service system. Automated portfolio management is now easier, more inexpensive, and more convenient thanks to robo-advisors. They can provide highly personalized services to meet the demands, tastes, and modes of engagement of each individual client, and they can be extended beyond the wealthy to appeal to the mass affluent market segments as well.
As a result, wealth management firms should think about how to best adopt robo-advice services and take advantage of the new opportunities that they present. Venture Capitalists who prefer human engagement over robo-advice will always exist; nevertheless, a solution that combines the two will succeed in the market. The digital revolution will continue to sweep the globe, and businesses will need to figure out how to use technology to help them strategically.