Algorithms and not humans are the future of wealth management, as robo-advisors are beginning to assert themselves and evolve the financial space. According to the research conducted by Business Insider, robo-advisors amounted USD 0.2 trillion of the asset under management in 2016, constituting 0.23% of total wealth under management that year (Global assets under management in 2016- USD 84.9 trillion ). This number is expected to grow to USD 8.1 trillion in 202o, showing a massive opportunity in the years to come.
As the number of users is expected to grow to 95.4 million by 2021, robo-advisors have a tremendous opportunity in sustainable investment avenues. These new types of mobile payment systems and financial service characterised by minimum human intervention have reached globally, the US still the market leader, followed by Germany, UK, China, and India.
In Europe, banks are providing robo-advisory services on their own and as part of the white labelled services. In India, fintech startups have launched robo-advisory services including autopilot advisory services for the new investor and providing full services for the matured investors.
Why is Fintech spreading wings?
Banks have witnessed a decline in their wealth management revenue post the global financial crisis. Moving ahead of regulatory compliance, operational efficiency, and margin challenges, wealth managers have made revenue growth their strategic priority and intend to leverage the improvement in customer experience management and mobile payment systems to do so.
At the same time the rising regulatory and compliance cost, have further burdened the wealth managers. Hence optimising cost and improving operating efficiency has become their primary focus. According to a study by EY and Forbes, 52% of wealth managers are taking a number of initiatives to reduce costs significantly.
Digital transformation is playing a crucial role achieving operational efficiency and revamping the wealth management value chain. Investments in client-facing technology and interactive tools are aimed to improve client experience, reach new markets and enhance products and services.
Clients prefer DIY Tech Support than Human Interface
As the markets crashed after the financial crisis, investors felt the pain of significant losses in their portfolios, causing them to examine their financial firm’s investment advice and question the financial advisor’s payment for their services. Clients demanded more interactions through digital channels. Robo-advisors offered the solutions through the following value propositions:
- Creating personal relationships with clients
- Aiding in full-service financial planning
- Tailoring plans for individuals based on risk and return objectives
Robo-advisors have made the path more comfortable for the clients due to low fees, slick interface, convenient user interface and tax-loss harvesting.
The digital capabilities wealth managers have built using robo advisory technology includes total wealth solutions and client data security. At the same time, the fintech firms need to incorporate transaction execution through mobile; which may include real-time portfolio monitoring and payment and settlement.
Robo advisory services have benefitted the fintech firms by opening new prospects to compete as it has lowered the expenses ratio and used mobile as the distribution channel. It has also ensured that the regulatory compliances are met through automated portfolio alerts and risk management tools.
For customers, robo-advisors have paved the way for better and more consistent advice in volatile markets. There are no upfront fees or hidden commissions, as the cost of infrastructure investment is phased out. These automated channels are taking decisions quicker than their human counterpart.
Currently, robo-advisors are helping the client to make portfolio allocation after answering a questionnaire via web-services or mobile apps. As a part of the service, the investment portfolios are created, and investment accounts are set up.
The investment decisions are made and monitored by algorithms to satisfy the pre-defined investment strategies. Here is how it works:
- Providing investors with a questionnaire to assesses risk appetite through various parameters like occupation, income, long terms goals, age and so on
- Offering a diversified portfolio of multiple asset classes like mutual funds, equities, bonds based on the risk-appetite
- Giving account rebalancing and tax harvesting facilities
The Future of Robo Advisory in Payments
Data analytics will be increasingly leveraged for mobile payment systems in robo advisory domain. Mobile payment systems leveraging big data analytics will help in better understanding of client’s needs and secure more targeted services. With the efforts to streamline the journey, the speed of data gathering will revolutionize.
Chatbots will be the future of data management. You will have to just tell the chatbot about the company of interest, and it will gather all the required information within seconds. It will also remind you about the speculation and factors about the economy and help you in the investment decision.
The use of messaging and social networking apps is growing at lightning speed. Users are spending ample of time on mobile apps now, and ‘Business and Finance’ apps are not behind. And according to Business Insider, in the US, more than half of users (51%) between the ages of 18 and 55 have already used chatbots.
As the technology improves, payments companies and banks will foresee a variety of roles and abilities for chatbots as the keyword-based responses are replaced with full conversations. In coming years, chatbots will detect if a customer’s credit score has dropped, recommend ways to bring it back up. Chatbots will ultimately take up the role of transaction agents.
The AI-powered chatbot will provide information on initial public offerings and investment accounts to help consumers set up new accounts.
Wealth management will move to fully automated advisory systems as robo-advisors will just scan the client portfolios and will open/close the positions with the self-developed algorithms and without human interactions.
In few years, clients will be able to transfer the entire responsibility of asset allocation and investment to an algorithm. Robo-advisors will be able to maximize the bank’s value by providing an increased amount of better and faster client services.
Wealth management will see more client-centric business strategies in the years to come as robo-advisors aim help to develop a client-perspective landscape based on usability, security and perceivability. We can say that robo-advisory platforms are here to stay and evolve in terms of product offerings and fees model.