Technology has changed the way we conduct our daily lives. Amongst other innovations, the introduction of robo-advisers has impacted the investment and savings habit of many people. The progress of artificial intelligence and its related technology has had both a social and economic impact.
Robo-advisers are a digital forum with an interface that uses artificial intelligence algorithms to craft investment portfolios for its users. The portfolio is built based on the investment preference of the investors. Robo-advisers are typically used for making low-cost investments.
The robo advisor algorithm usually collects information about the client's investment requirements, risk preferences and fund flows. Once they have the acquired details on these elements, they start to build an investment portfolio accordingly.
Wealth management industry uptake
Although robo advisors are commonly perceived as being more appealing to younger working people, they are also popular amongst experienced investors who place some of their more static investments in ETFs and mutual funds. These investors use robo advisory platforms as a way to focus on their more dynamic portfolios, as it frees up time and saves on transaction costs.
It is increasingly evident that customers want to avail themselves of the most cost-effective options and are beginning to prefer online options in all aspects of their daily lives. When it comes to investing, convenience and quick implementation takes precedence over dealing with someone over the phone or in person.
As such, banks and other financial institutions are now seeing the need to have their own in-house robo-advisors so that they don't lose out on valuable business to other banks that offer such services. Robo advisory has allowed these institutions to leverage their existing customer base, offering them new services without increasing overheads. This realization has led to the uptake of robo advisory by larger institutions and provided legitimacy for the technology. Its rapid growth has led to more business and more demand for robo advisors.
The future of robo advisors
Most robo advisor platforms automatically rebalances and adjusts portfolios according to changing market conditions. Some robo advisors allow their users to adjust their investment, risk parameters, but most do not offer extensive customization.
Due to their less flexible approach, robo-advisers are more suitable for investors who prefer a hands-off approach to their investments. They offer a low cost and convenient option for investors who do not require a high personalization level for their investments, either due to a lack of time or experience in investing.
The main investment option for robo-advisers are ETFs, which are more passively managed compared to mutual funds. The ETF’s structure permits free trading between investors, making them more liquid, cheaper, and more attractive for the retail investor without a limited amount of capital to invest.
Many banks are now investing in robo-advisory businesses to attract and retain customers that prefer an easy and low hassle solution for investing in basic mutual funds and ETFs, with minimal expense and time spent in the investment process. This is a win-win situation for both banks and investors as banks typically target their existing customers first in offering wealth management services.
A bank’s retail customers typically use their accounts to invest funds through robo advisors and grow their portfolio. Once the portfolio is large enough to warrant more careful handling, the asset management and wealth advisory branch or division of the bank steps in to handle the client’s growing portfolio. This investment chain helps banks retain their customers' funds and offer them a low cost and convenient investment option to begin their investment journey. This will eventually create a lucrative business pipeline for a bank's wealth management business.
The usage or robo advisors in financial institutions is rapidly picking up pace. Banks are increasingly aware of the need to be creative in deploying new technologies to keep up with fintechs and regain market share, particularly in wealth management. This will eventually foster a healthy global financial ecosystem with successful partnerships and healthy competition between the two.