Robo advisers: threat or opportunity?
Robots are already serving customers in department stores and banks in Japan, as well as building the machines of tomorrow around the world. Now the robots are coming to the financial industry, should advisers be worried?
“Robo-advisers,” web-based, low-cost investment management services, have recently become one of the fastest-growing players in the retail investment world, with their rapid rise putting plenty of “human” advisers on the defensive.
But according to a report by State Street Global Advisors, “Embracing Change as Opportunity,” advisory firms and their investment professionals who harness the power of these machine advisers can gain powerful benefits, for both adviser and client.
A growing generational shift means advisers now need to meet the distinct needs of two different types of clients: older clients such as baby boomers, which are increasingly focused on retirement solutions and passing on wealth; and younger generations (Gen X, aged 33 to 48 and Millennials, aged 18 to 32), which are seeking more innovation, including access to the latest technology.
In the State Street Global Advisor report, just 54 per cent of millennials, 50 per cent of Gen X and 49 per cent of baby boomers prefer working face-to-face or over the phone when making investments, with a majority seeing value in technological applications.
Client loyalty
Cost savings are an attractive element in the switch to robo platforms, which can provide a cost-efficient means of building a diversified portfolio. But according to research, clients who understand the value of adviser services are less tempted to change, with most placing a higher value on advice when a person is involved.
Advisers who understand clients’ financial literacy, are upfront and take the time to ensure comprehension of the compensation structure can therefore win greater client loyalty, according to State Street Global Advisors.
In the US, John C. Christianson, CEO of Highland Private Wealth Management, sees a growing opportunity in servicing the gap between the “pure” robo-adviser market and the traditional assets-under-management fee-based model pursued by most advisers. For example, Christianson combines low-cost, ETF-based portfolio management with high-touch services which allow him to customise financial planning strategies.
For example, while robo advisers can automatically rebalance portfolios to maintain a fixed-allocation model, they are unable to exercise nuanced judgement about the timing of the rebalancing or decide which positions to liquidate in the process.
A key difference, however is advisers’ experience in preventing clients from making decisions based on irrational exuberance or fear, something which cannot be replicated by a robo adviser.
State Street Global Advisors suggests ways advisers could incorporate the benefits of robo advisers into their service offerings, to add efficiencies, increase profitability and economically serve clients who may currently have limited assets but eventually will have more investment dollars and more complex planning needs.
Combining the human touch of an experienced adviser with the logic, fee transparency, methodology and accessibility offered by robo-adviser platforms can be a powerful combination. The rise of the machines might not spell the end for human advisers after all.
Fill out the form below to download Embracing Change as Opportunity by SSGA.
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