In this digital age, a new type of financial advisor has emerged which may have tremendous implications for the financial advisory landscape.
What is a robo advisor?
A robo advisor utilizes computer algorithms in order to build and manage portfolios. Using client surveys, robo advisors determine and recommend investment strategies. Supporters of this new type of investment platform say that the robo advisor is able to assist investors at a lower cost because of technological functionality. They also argue that this technology allows for greater transparency of fees and comparative performance data. Clients can see how they are doing compared to other investors and can therefore make more informed decisions based on this data. While certain portfolio managers have always been required to supply performance and fee data according to specific understandable guidelines, new regulation is nudging the entire industry toward fee transparency.
Proponents see this as a way to entice investors of all income brackets, especially interested beginners who may regard this as an opportunity to start investing. A good segment of investors who wish to participate in the markets simply cannot afford to consult a traditional financial advisor, and a robo advisor can fill this role at a less expensive rate.
Moreover, advocates of the robo technology say this type of investing will attract a younger generation of professionals who rely heavily and consistently on the internet – and the pricing structure appeals to a much wider demographic, with annual fees ranging from 0.15% to 0.85%. When compared to the usual 2% or more paid to conventional financial advisors, these rates look like bargains, but they may not be enough to entice individuals who prefer a more personalized service and the expertise of professionals who can guide them through the ever-changing investment landscape.
How does the robo advisor affect the investment management industry?
Financial advisors might see robo advisors as competition. Whether they are a legitimate threat or not, the emerging technology will push financial advisors into becoming more efficient and being more aware of the types of products they offer, thereby maintaining their relevance.
The relationship between advisors and clients will need to go through some changes. Financial advisors could adopt a few strategies employed by robo advisors, such as taking advantage of specific technological advancements to reduce fees. By shifting some communication to the internet or social media platforms, advisors can provide ongoing guidance to investors and engage with potential clients in a digitally interactive way. There is something rather appealing in knowing that a live person, rather than a computer, is on the other end of the conversation. Nonetheless, some of the new automated platforms are using a blended approach that also provides limited access to an advisor that is a real person. Traditional financial advisors might also want to target younger generations when creating their marketing campaigns.
The rise of algorithmic asset managers will not displace the current financial advisory model, but it will lead to downward pricing pressure for those who fail to differentiate. According to one view, robo advisors are serving entirely different markets from the ones served by traditional financial advisors. Robo advisors are more likely to cater to those who could not previously afford financial advisory services. These new clients may eventually graduate to a higher service platform served by professional wealth advisors and portfolio managers, especially as their investing and estate situations become more complex. In this light, robo advisors could be considered a pipeline for getting more people involved in investing. However, there is evidence that certain individuals with higher net worth are also dipping their toes into the new services, given the impact that fees can have on long-term portfolio returns. At the same time, sophisticated investors have voiced concerns that there is not enough clarity with respect to the investment strategies being employed by automated asset managers.
While some view this as a fad that will not gain much traction, others see it as a glimpse into the industry’s future. No matter how we look at the robo advisor’s role, the emergence of online algorithmic asset managers will definitely pave the way for change in the investment industry.