Robo advisors for financial institutions

Both institutional and individual investors have taken notice of the advantages that robo advisors offer. This is evident from the rise in user accounts and the volume of capital invested through robo-advisors.

The main advantage of robo-advisors lies in its ability to bypass the financial advisor. The removal of these intermediaries as well as their associated biases and costs is quickly increasing the market growth of robo advisors. The quick, simple, and cheaper investment option that robo advisors offer is driving its total market share into the billions.

As of March 2020, Vanguard Services managed $148 billion and Schwab Products managed $40.7 billion. While the pandemic may have affected their growth rate, there is no arguing that robo advisors are here to stay and has many benefits to offer to its users.

Benefits for banks and investment managers

Robo advisors bring considerable benefits for financial institutions, from cutting costs to expanding market share. Some of the main advantages of robo advisors for financial institutions and wealth managers are listed below:

  • An automated platform gives investment companies the cost advantage of low to zero human capital. This reduces their costs to a great extent, which is then passed-down as a benefit to users.

  • Automated systems are available around the clock, provided that there are no issues with the internet connection. A system that is available 24/7 allows financial institutions to provide uninterrupted access and services to its customers, increasing the bank’s value to the customer. It is a win-win situation as the financial institution also stands to benefit from continuous and increased engagement of the customer on the robo advisor platform. This is one of the main reasons why investment managers are progressively adopting robo advisors.

  • Financial institutions also benefit from an expanded target market as the ability to invest lesser funds has opened up new customer base, and target the mass affluent.

  • The efficiency and effectiveness is also considered to be better through the automation of the investment process. When a client wants to execute a trade with an actual investment advisor, they must communicate with the advisor and provide some paperwork. Robo advisors have enabled banks and firms to reduce their execution time by providing clients with digital compliant onboarding for the customers, and make trading more efficient by reducing the middle men.

Benefits for the investor

For investors, the main benefit of investing through a robo-advisor is the cost to invest. Robo advisors lower the barrier to entry and provide a more inclusive environment for investing. It widens the customer demographic to the mass affluent and even low income earners. The major advantages are summarized below:

  • Low investment requirements: Robo advisors are available for lower-income investors. Investors with less than $100,000 (and as low as $1000) can access investment services. This is a vast difference from the traditional wealth management benchmarks, where investor access is usually restricted to people with over $100,000 to invest annually.

  • Low fees: Investment advisory fees are relatively high in the US. These are usually about $300 per hour. This makes for about 1% to 3% of AUM. As for robo advisors, the fee is small, usually at around 0.5% of AUM (if not lower).

With so many advantages and being a future-friendly technology, the robo advisors are here to stay and grow further. While they may not replace the traditional wealth advisory industry, they are quickly building up a new market with the advantages they have to offer.