Robo-Advisors are improving accessibility to sophisticated financial management and creating margin pressure, forcing traditional advisors to evolve.

New entrants are placing pressure on margins and intensifying competition among traditional players in more specialized segments. As more advisory functions become automated, distributing wealth products via proprietary advisory channels is becoming less effective, especially as new entrants widen the access for mass customers, competing for customers’ traditional savings deposits.

And competition will not only focus on technology but chiefly on Performance.

The emergence and growing popularity of automated wealth management services and customer empowerment tools will pose a tangible threat to the traditional practices of the wealth management industry. However, incumbent institutions who can embrace these innovations and streamline their processes will be able to provide higher value services to a broader customer base.

The ability to access sophisticated capabilities without large infrastructure investments flattens the playing field for mid-sized institutions. Organizational agility is becoming critical to sustain competitiveness as high-value capabilities are becoming crucial commodities. 

The takeover of the robots in the classic field of Wealth Management is an emerging trend across the industry. This might be the yet missing revolution to meet client expectations in a digitalizing banking environment.

Understanding Robo-Advisory

Google search queries for “Robo-Advisor” yield 450.000 results and there are to 200 Robo-Advisors in 15 countries as of today. And while all of them make wide use of the term, the offerings themselves vary significantly.

Estimates for the future Robo-Advisory market by several well-known institutes predict between $2.5 trillion and $4 trillion in assets to be managed with the support of Robo-Advisory services in 2020. By the year 2025 this figure is expected to rise to over $20 trillion asset under management (AuM), roughly three times the amount of assets managed by BlackRock, the World’s biggest asset manager to date.

 Robo-Advisory is a key topic representing highest relevance in terms of the future of the Wealth and Investment Management market.

But what does the term “Robo-Advisor” mean?

The word consists of two parts: “Robo” (for robotics) and “Advisor”. Where “Robo” stands for an automated process without the influence of human being, utilizing mathematical algorithms to support investment decisions. “Advisor” stands for Wealth Management services, om this case an automated manner, making use of regular online or mobile channels. Putting these terms together we are talking about an online portfolio management solution that aims to invest client assets by automating client advisory. Encouraging self-management of financials, Robo-Advisors provide necessary information in a totally different way that doesn’t require deep financial background and knowledge.

Robo-Advisors translate client input into investment logic such as risk appetite or liquidity factors and propose adequate investment opportunities well beyond simply highlighting a handful of ETFs out of a few thousand possibilities. The majority of Robo-Advisors aim to allocate their clients to managed ETF-portfolios based on individual preferences.

Comparing current Robo-Advisors in the market four categories of features and services can be outlined.

Type A Robo-Advisors

Clients receive single-product proposals or portfolio allocations based on listed investment products after answering a questionnaire to filter suitable options. Most firms operate via web-service or smartphone app. There is no bank or broker-API managing the execution. Clients have to buy and manage a real product-based portfolio on their own by using their own accounts, and also manage future adjustments. Product variety includes stocks, bonds, ETFs and other investment vehicles.

Type B Robo-Advisors

Investment portfolios are created as a fund of funds, and setting up investment accounts as well as direct order execution is part of the service. The asset allocation is managed on a manual basis by dedicated investment managers. Questionnaires are not only used to filter suitable products but to allocate clients to a handful of predefined risk-allocated portfolios. Real investment managers take care of investing and adjusting client portfolios. The realization is semi-automatic as investment managers oversee the investment algorithm and define rule sets.

Type C Robo-Advisors

Investment decisions and portfolio rebalancing proposals are based on algorithms which monitor and satisfy pre-defined investment strategies. Final oversight is provided by professional fund managers. Some services enable the clients to follow or neglect proposed portfolio adjustment decisions in order to individualize their portfolios.

Type D Robo-Advisors

Sophisticated risk management and profiling questionnaires lead to direct investments via self-learning artificial intelligence (AI) investment algorithms. They shift between different asset classes based on changing market conditions and individual investment needs such as profit, risk appetite and liquidity aspects, monitor and adjust single client portfolios in real time to keep on track with their selected investment strategy.

 Based on previous evolution of Robo-Advisors it can be outlined that as of today about 80% of Robo-Advisors have Type C capabilities with an increasing trend to automation and service offerings.

The Market

The Market consolidation has already started and will point out the winners of this race – those who deliver what they promised in terms of Performance.

However as long as banks are partnering with the same solution-providers, we expect to see a variety of Robo-Advisors using similar technology and investment processes. Depending on the ability of the bank’s API to connect their infrastructure and services, single Robo-Advisor solutions can maximize their added value by providing increased amount of faster and better client-services. Hybrid-Robo-Advice is the ongoing trend which can be expected to accelerate further in the near future as the logical next step towards self-learning algorithms in Robo-Advisory.

How Hudson Metrics is playing its role

Hudson Metrics is working with a number of banks and investment management companies to assess the impact of the traditional Wealth Management business and define client-centric business strategies.

This includes UX and UI design with the projects Uneqa and AlgoDirect.

The overall goal of Hudson Metrics in developing Robo-Advisors is to adopt the client perspective, which is mainly driven by security, perceivability, and usability and allow both established market participants and new entrants to address these in their operating model.

 The challenges today’s Wealth Management firms face are significant and will change the industry – Hudson Metrics stands ready to become a leader.