Rise of the robo-advisers

The catchy, albeit inaccurate nickname “robo-adviser” encompasses a relatively wide range of business models, employing a different mix of robotics and human touch. These include completely automated web-based investment advice models such as those adopted by US firms Betterment or WealthFront, as well as hybrid models, involving advisers charging time-based fees, such as that of Quirion Bank in Germany. 

Around 80 per cent of the $20bn of the AuM that startup robo-advisers will run by the end of 2015 will be managed by US-based firms, according to Swiss independent research firm MyPrivateBanking. The trend is supported by the strong venture capital, technology-oriented society and stronger equity investing tradition in the country. 

By 2020, the global AuM of robo-advisers is forecast to grow to an estimated $450bn (€405bn), half of which will still be in the US. 

The bull market of the past few years has fuelled the growth of automated investment platforms but “robo-advisers will stand the test of time only when the next crisis strikes,” expects Steffen Binder, research director at the Swiss firm. Investors may get nervous and, with no adviser holding their hands, may pull out all their assets just when the market hits the bottom. 

But servicing clients online is not necessarily a lower value proposition. “We strongly believe that you can service your clients online in a more systematic and consistent way,” says Shaun Port, CIO at London-based online discretionary wealth management Nutmeg.

Regular communication through blog articles or videos is aimed at helping clients understand market volatility and importance of investing for the long term, as well as overcoming behavioral issues linked to investing, such as loss aversion, explains Mr Port.

Rapid advances in technology and improvements in raw computer power are a key driver of digitisation, states Huw Thompson, business development director at provider of outsourced investment administration services Equiniti. 

Investment firms can significantly reduce their cost, by outsourcing technology services to cloud-based data farms and processing centres, able to provide processing power on demand. 

“If you are modeling and rebalancing several thousand clients’ accounts in one operation, then you need to have that sort of access on demand,” says Mr Thompson.

In the future, firms will be able to gather more detailed, rich information about their users, supported by tools such as Google analytics, or web-based services. 

“Irrespective of whether client interaction is via a robotic adviser or an execution only stockbroker, the more information gathered, the better a service can be tailored to that individual and delivered in a way that is more effective. That really adds value to the client experience,” states Mr Thompson.