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October 18, 2016
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Robo-Advisors – Where Big Data replaces Wall Street!

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 –

  1. Growth in the Wealth Management business largely depends on the ability to sign up new clients. Previously WM shops would not be interested in signinup up clients with less than a certain value of investable assets (typical threshold being $ 1 million). However the need to on-ramp these folks onto a long term relationship means being able to offer lower cost automated business models that better fit their mindsets
  2. The mentality of younger clientele has also evolved over the years. These clients are technologically savvy, they largely have a DIY (Do It Yourself) mindset and their digital needs are largely being missed by the wealth management community. This rising segment demands digital services that are highly automated & 24/7 in nature without needing to pay the premium charged by a human advisor
  3. Regulatory, cost pressures are rising which are leading to commodification of services
  4. Innovative automation and usage techniques of data assets among new entrants aka the FinTechs are leading to the rise of automated advisory services thus challenging incumbent firms. At traditional brokerage firms like  Morgan Stanley, Bank of America Corp. and Wells Fargo & Co. about 46,000 human advisers were employed as of 2016. The challenge for these incumbent firms will be to develop such automated investing tools as well as offer more self-service channels for customers [2]
  5. A need to offer aggregated & holistic financial services tailored to the behavioral needs of the HNWI investors on an individual basis

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 –

  1. Investment Advisory – Helping a client construct an investment portfolio that helps her/him prepare for life changes based on their respective risk appetites & time horizons. The financial instruments invested in range from the mundane – equities, bonds etc to the arcane – hedging derivatives etc
  2. Retirement Planning – Retirement planning is a obvious function of a client’s personal financial journey & one that lends itself to automation. From a HNWI standpoint, there is a need to provide complex retirement services while balancing taxes, income needs & estate prevention etc. Robo-advisors are able to bring in market trends and movements of securities to ensure that client’s retirement holdings are not  skewed toward particular sectors of the marke.
  3. Estate Planning Services – A key function of wealth management is to help clients pass on their assets via inheritance. The Robo-advisor can assist a human wealth managers helps construct wills that leverage trusts and suggest suitable forms of insurance etc to help facilitate a smooth process of estate planning
  4. Tax Planning – Robo-advisors can help clients manage their wealth in such a manner that tax impacts are reduced from a taxation (e.g IRS in the US) perspective. As the pools of wealth increase, even small rates of taxation can have a magnified impact either way. The ability to achieve the right mix of investments from a tax perspective is a key capability and one that can be automated to a high degree
  5. Insurance Management – A Robo-advisor can help suggest and manage  the kinds of insurance purchased by their HNWI clients so that the appropriate hedging services could be put in place based on the client’s specific investment mix & exposures
  6. Institutional Investments– Institutional Robo-advisors can provide investment services to investors like pension funds, hedge funds etc while automating them a variety of backoffice functions

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.[1]

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.[2]


Robo-advisory business models

Currently there are a few different business models that are being adopted by firms.

  1. Full service online Robo-advisor that is a 100% automated without any human element
  2. Hybrid Robo-advisor model being pioneered by firms like Vanguard & Charles Schwab
  3. Pure online advisor that is primarily human in nature

Conclusion –

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.[2]

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. 


  1. Wikipedia –
  2. Bloomberg – “The Rich are already using Roboadvisors and that scares the banks..”

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