Wealth Management is the highest growth businesses for any medium to large financial institution. It also is the highest customer touch segment of banking and is fostered on long term (read extremely lucrative advisory) relationships. This three part series explores the automated “Robo-advisor” movement in the first post. We will cover the business background and some definitions . The second post will focus on the overall business model & main functions of a Robo-advisor. The final post will look at a technology & architectural approach to building out a Robo-advisor. We will also discuss best practices from a WM & industry standpoint in the context of Robo-advisors.
(Image Credit – Forbes)
The term ‘Wealth Management‘ broadly refers to an aggregation of financial services that are typically bespoke and offered to highly affluent clients. These include financial advisory, personal investment management, financial advisory, and planning disciplines directly for the benefit of high-net-worth (HNWI) clients. This term can refer to a wide range of possible functions and business models.
A wealth manager is a specialized financial advisor who helps a client construct an entire investment portfolio and advises on how to prepare for present and future financial needs. The investment portion of wealth management normally entails both asset allocation of a whole portfolio as well as the selection of individual investments. The planning function of wealth management often incorporates tax planning around the investment portfolio as well as estate planning for individuals as well as family estates.
The ability to sign up wealthy individuals & families; then retaining them over the years by offer those engaging, bespoke & contextual services will largely provide growth in the Wealth Management industry in 2016 and beyond.
However, WM as an industry sector has lagged other areas within banking from a technology & digitization standpoint. Multiple business forces ranging from increased regulatory & compliance demands, digital demands & expectations from younger, technology savvy customers and new Age FinTechs have led to firms slowly begin a makeover process. Let us examine these trends in more detail.
Business Trends Driving the need for Robo/Automated Investment Advisors –
These trends are a combination of industry reality as well as changing preferences on behalf of the HNWI clientele –
So where is the biggest trend in this disruption? It is undoubtedly, the Robo-advisor.
Introducing the Automated Advisor (affectionately called the Robo-advisor) –
FinTechs led by Wealthfront and Betterment have pioneered the somewhat revolutionary concept of Robo-advisors. To define the term – a Robo-advisor is an algorithm based automated investment advisor that can provide a range of Wealth Management services described below. The Robo-advisor can be optionally augmented & supervised by a human adviser. At the moment, owing to the popularity of Robo-advisors among the younger high networth investors (HNWI), a range of established players like Vanguard, Charles Schwab as well as a number of FinTech start-ups have developed these automated online investment tools or have acquired FinTech’s in this space.e.g Blackrock. The Robo-advisor is built using digital techniques – such as data science & Big Data – as we will explore in the next post.
What service models can Robo-advisors satisfy –
Full service Wealth Management firms broadly provide services in the following core areas which Robo-advisors can slowly begin supplementing –
Currently most Robo-advisors limit themselves to providing the first function only i.e portfolio management (i.e. allocating investments among asset classes) without addressing issues such as estate and retirement planning and cash-flow management, which are also the domain of financial planning.
Expect this to change as the technology rapidly matures in the years to come with advances in cognitive computing that will enable . At one of the earliest Robo-advisors, Betterment, as of early 2016 – more than half of their $3.3 billion of assets under management comes from people with more than $100,000 at the firm. Another early starter, Wealthfront estimated more than a third of its almost $3 billion in assets in accounts requiring at least $100,000. Schwab, one of the first established investment firms to produce an automated product, attracted $5.3 billion to its offering in its first nine months.
Robo-advisory business models –
Currently there are a few different business models that are being adopted by firms.
As one can see clearly, automated investing methods are still in early stages of maturity. However, they are unmistakably the next big trend in the WM industry and one that players should begin developing capabilities around. According to AT.Kearney, by 2020, Roboadvisors will manage around $2.2 trillion in global HNWI assets.
The next post in this three part series will focus on the pivotal role of Big Data in creating a Robo-advisor. We will discuss system requirements & propose a reference architecture.