Propelled by the 2008 global financial crisis, Financial technology (FinTech) has filled the irreversible gap left behind by the crisis. From mobile payment to blockchain technology, technology-driven alternatives for financial management have since disrupted the financial industry in the past decade.
For years, the FinTech industry has evolved and reshaped the various areas of commerce, investment, and asset management scenes within the financial sector. However, it is only in recent years that the FinTech‘s impact is felt more prominently in the industry, especially during the outbreak of coronavirus. One such example would be the automated wealth managers, where the increasing attention towards this technological creation are slowly changing the dynamic of the wealth management industry.
What are Automated Wealth Managers?
Automated wealth managers or “robo advisors” was launched in 2008 and made use of pre-programmed algorithms to generate a range of digital financial solutions and completing tasks that are usually performed by human, financial advisors.
Although there is minimal human interaction involved, automated wealth managers just like a human financial advisor, can assess clients’ risk tolerance and allocate assets, such as bonds, stocks, commodities and cash to achieve clients’ desired goals efficiently. They can also have the ability to automatically rebalance fund portfolios to maintain targeted asset allocation and prevent tax loss.
As such, it is no surprise that automated wealth managers are redefining the investment industry, satisfying the on-demand needs of tech-savvy clients in terms of financial planning, investment advice, asset allocation and portfolio optimisation. This has posed a considerable threat to the traditional wealth management field, challenging the position of established wealth managers within the industry.
The Emergence of Automated Wealth Managers
Contrary to the collective knowledge on the inventions in the FinTech industry, automated wealth managers’ technology has been used by investors and financial advisors since the year 2000. However, as the world is slowly entering the cyber-age, migration of wealth has occurred in response to the change of consumers’ demographic. Experts predict that the shift for automated wealth managers as a powerful alternative will continue for several more decades and established players will have to embrace and adapt to these changes to stay afloat in the new market.
As the baby boomer generation is expected to retire from the workforce gradually over the near future, the wealth assets of this generation will be transferred to the next generation. Unlike the older generation, the future wealthy are raised in a digital world, accustomed to interacting with digital platforms. Their technological reliance has led them to crave for flexibility where financial services can be available anytime and anywhere.
In addition to being digitally native, the younger investors typically lack brand allegiance and are indifferent to established financial institutions. This new generation will also seek advice from multiple sources, understand the value of information with the complete cost transparency rather than sticking to one brand and make decisions at face value.
The generational shift in the customer base, coupled with a technologically inclined society, has driven a significant change in the behaviours and expectation towards wealth management services, resulting in automated wealth managers becoming an emerging trend in the FinTech industry.
Advantages and Disadvantages
The ability to customise to the needs of the wealth management industry along with a series of benefits have led to the automated wealth managers’ surge in popularity. However, it is not always all rainbows and unicorns as automated wealth managers have their disadvantages as well. These pros and cons are as follows.
As a solution to the younger, tech-savvy demographic, automated wealth managers can offer convenience through algorithm-driven investing, where a range of portfolios can be generated in an instant. Also, with the help of sophisticated software, automated wealth managers can provide mass investors with the opportunity to access investments that were once reserved for a selected group of investors.
Similar to the standard investment strategy offered by traditional financial advisors, automated wealth managers can also offer customised portfolios, and yet at a significantly lower cost and greater fee transparency. This has thus made automated wealth managers more appealing to cost-sensitive investors.
Though technology is helpful in many ways, there are still many limitations for automated wealth managers in carrying out specific actions. The most notable one is the complete lack of human element that is essential for relationship building in the financial advisor’s business. This is still relevant as some investors nowadays still prefer to discuss their fears and hopes with a real person.
Moreover, the inability to deviate from the algorithms also limit the services that automated wealth managers provide as investment choices can only customisable up to a certain point. Unlike traditional advisors, automated wealth managers will not be able to offer specific information and investment tactic in regards to customers’ requested investments preference and fulfil their short, medium and long term goals. There will also be a convergence of investment strategies among robo advisors due to similar investors data sample. It will also difficult to buy individual stocks with the help of automated wealth managers.
Lastly, although automated wealth managers charge lower fees than traditional investment advisors, investors may still have to pay relatively higher currency conversions fees, subscription fees and taxes. As such, automated wealth managers alone may not the perfect solution to the customers’ demands for wealth management.
A Hybrid Future
According to financial experts, future investors will prefer a hybrid advisory approach that combines both human and robo advisors, rather than just relying on automated wealth managers. This is because human advisors will be able to provide investors with emotional support, such as hand-holding through difficult markets by balancing their portfolio accordingly to the situation, to maximise on opportunities. Also, it is human nature to hold someone’s responsibility if the desired outcome is not achieved, thus, many investors will still prefer human advisors due to liability issue. Thus, a hybrid model that combines the desirable aspects from both the human advisor and automated wealth managers will be most suitable in solving the problems faced by the wealth management industry.
To understand how your business may benefit from a hybrid advisory approach in wealth management, it is best to engage established business consultancy experts like Desfran. Spearheaded by one of the world’s leading management teams, our team of seasoned experts have years of experience in providing wealth management advice. We constantly stay on top of trends and movements in the financial markets to help your business grow by providing comprehensive customised solutions.
Contact Desfran today.
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Automated Wealth Managers (robo-advisors): Financial Advice in 2018, bitemoney.com
Robo Advisors in Singapore – Is This Approach to Investments Right for You?, Blog.moneysmart.sg