The rise of robo-advice. And what comes next.
The rise of robo-advisors is moving fast. The automation and algorithms behind it are advancing, all kinds of investors are using it, and more and more firms are launching their own platforms.
Simply put, robo is impacting the entire financial services industry in ways people never imagined.
To help get you oriented with robo’s wild journey so far, here’s a rundown of how it began, where it’s at now and where it will be soon.
Where robo-advice was – Humble beginnings
When the first robo-advisors launched back in 2008, they were generally limited to simple automated tasks, such as rebalancing assets in target-date funds. Because of the so-called lack of personalized service and human connection, many supposed robo’s basic role would continue.
But it would soon make major inroads. By the end of 2015, assets under management for robo-advisor platforms was at US$55-$60 billion.1
The general thinking around the growth of robo, however, was still low key. Many in the industry believed it could only serve the needs of tech-savvy millennials or those with little money to invest. In 2016, a Prudential Financial report found that only 17% of advisors believed robo-advice could help clients meet their financial-planning needs.2
Robo-advisors today – Prospects and adoption growing
Fast forward to now. That Prudential report found the same view among advisors changed dramatically in 2017, with 69% now believing robo-advice could meet financial-planning needs.2
Adoption of robo-advice has also grown considerably, with US$224 billion in AUM as at October 2017.3
“Adoption of robo-advice has also grown considerably, with US$224 billion in AUM as at October 2017.”
The typical profile of robo-advisor investors has changed in interesting ways too. Among the 14 robo-advisors in Canada, the average age of a user today is around 44 years old.4
Innovative fintech firms, such as True Link Financial, are even finding success among elderly investors by blending digital advice with over-the-phone service and prepaid debit cards.
What comes next for robo-advice – Beyond automation and ETFs
Looking forward, expectations for growth are high. A Business Insider report projects that robo-advisor AUM will hit US$1 trillion by 2020 and about US$4.6 trillion by 2022. While the North American market is expected to lead the way in the near term, Asia’s robo segment is expected to outperform by 2022.5
Yet, like any vastly growing space with new players hitting the scene, saturation of the market is inevitable. Robo’s strongest features – automated tax management, goals-based advice and exchange-traded fund (ETF) portfolio construction – are becoming basic commodities.
For financial firms to truly differentiate themselves, robo-advisors will have to do more than simply offer lower fees. The next leap forward – which is beginning to take shape among fintech firms – will be artificial intelligence (AI) and machine learning driving a more holistic robo solution that is specifically tailored to investors’ needs.
“The next leap forward – which is beginning to take shape among fintech firms – will be artificial intelligence (AI) and machine learning driving a more holistic robo solution that is specifically tailored to investors’ needs.”
In other words, robo’s future lies beyond automated portfolio management and low-cost ETFs. Making sustainable gains among all age groups, those with greater investable assets and, ultimately, the high-net-worth segment will come down to offering new, proprietary investment solutions that are not only cost-effective but can outperform, too.
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1 Aite Research, Digital Wealth Management Market Update: A Mosaic of Models Emerges, March 2015
2 Prudential Assurance Company, Adviser Barometer report, Embracing opportunities in the adviser market, 2017
3 U.S. News & World Report, 9 Things to Know About Robo Advisors, 2017
4 The Globe and Mail, Robo-advisers find popularity where few thought they would, 2017
5 Business Insider, The Evolution of Robo-Advising Report, 2017