If we are to believe all that we read, the wealth management industry is being taken over by so-called ‘robo advisers’. However, the term is slightly misleading, as they do not provide advice in the formal sense and only relatively small elements of their offerings are ‘robo’.
These days, investors and their advisers can turn to devices for education, to ‘advise’ on the appropriate portfolio based on their risk profile, to execute trades and to manage their portfolio. In reality, these are simply tools to help or simplify a process based on algorithms. They are typically used by do-it-yourself or self-directed consumers as well as financial advisers who can offload some of their more mundane tasks to the ‘robo adviser’. But currently there are no fully automated robotic services across the whole advice chain process, without human intervention.
What is clear is that there is a growing interest in the use of technology to deliver financial guidance to consumers at a lower cost than that provided by human advisers. Online discretionary direct investment services such as Nutmeg have made some inroads, but as ever we should look to the US for a sense of how things might progress.
There, the roll-out digital wealth management is being driven by the need for combinations of low-cost digital advice with face-to-face human advice. Technical advances have accompanied demographic developments. The availability of new sources and large volumes of data (that is, big data) has meant that new techniques are now available to understand consumer behaviours – look for behavioural patterns and better match investment portfolios to customer needs. The availability of data, including personally identifiable customer transactional level data and aggregated and personally non-identifiable data has increased over the past five years.
Techniques for extracting insights from large volumes of data have improved significantly. For instance, machine learning techniques can be used to build predictive models to determine financial needs, product preferences and customer interaction by analysing large volumes of socio-demographic, behavioral and transactional data. At the same time, big data and cloud technologies are able to facilitate this combination of large volumes of structured and unstructured data. In particular, big data enables analysis of large volumes of data and generates real-time insights. The availability of memory and computing power in the cloud allows start-up companies to scale up on demand instead of setting up an IT infrastructure beforehand.
Currently, most established wealth management firms still print, fax and mail complex and difficult-to-understand hard copy reports and statements to their clients. In contrast, digital entrants have enlisted the help of skilled writers and bloggers to reach their customer base through meaningful and personal media content.
So it is clear that robo advisers are not yet robotic replacements for face-to-face financial advisers, but instead are technology-driven tools to fill or take over some part of the wealth management process. In essence this is a natural evolution of modern portfolio theory as a digital experience. It means that customers benefit from better-looking information interfaces and it takes them away from conventional charts, graphs and jargon into a digital explanation of how well or otherwise investments are doing.
