Is Robo-Advice the Future?
The emergence of financial technology (Fintech), has presented many new and exciting opportunities, one of which is robo-advice. Robo-advice is a type of financial advice provided to the investment and wealth management industry via an online platform with little or no human intervention. Often this is conducted through an online automated investing service.
As the investment industry has become more efficient over the years, the focus on cost-cutting has become more prominent, resulting in numerous financial services groups launching online robo-advice offerings. With these developments, the consequential question is, “Is robo-advice the future”?
To answer this question, we need to look at significant market trends, as well as the positives and negatives of personalised financial advice and robo-advice.
Robo-advisors generally target younger individuals below the age of 30. These younger individuals often do not yet have significant lump sum and thus seasoned financial advisors sometimes leave them underserviced. Rather, seasoned financial advisors typically remain focused on higher net worth individuals and receive a financial advisory fee for their services. Moreover, younger people are generally more tech-savvy and comfortable with online electronic applications.
Yet, an important aspect to this question is whether people are willing to trust computers to advise on and manage their hard-earned investments and wealth? Indeed, there remains an enormous unfamiliarity with robo-advice and numerous psychological studies demonstrate that personalised financial advisors provide an important component to the investment process. This speaks to the element of human trust, personalised interaction, the generation of an interactive financial needs analysis and figurative ‘hand-holding’.
On the other side of the argument is the fact that robo-advice can be offered at a lower fee, which reduced the overall cost of investing and potentially improves the net rate of return. All of this assumes, however, that appropriate advice (such as personal tax) was provided, the correct investment structures were implemented and the optimal risk-return analysis appropriate to the individual was conducted.
Robo-advice may also assist in removing the ‘emotional’ aspect of financial advice. That being said, in most cases well-qualified personalised financial advisors are in a better position to explain volatile market conditions and the required changes to an investment in a more personalised manner than a robo-advisor.
While the quantum managed by robo advisors of the $103 trillion of investments globally currently managed by wealth managers is estimated to be some $3 trillion, the percentage is expected to grow to some 10% with emergence of new young investors, improvements in robo-advisory technology, and familiarity with the offering.
In the short-to-medium term, however, personal investors will continue to trust professional advisors and human interaction will not be replaced by an artificial intelligence system anytime soon. Indeed, the ability of one person to connect with another and understand their needs remains fundamental to most clients who seek to build and consolidate their hard-earned wealth.
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