“A self-guided online wealth management service that provides automated investment advice at low costs and low account minimums, employing portfolio management algorithms.”
The History of Robo Advisers
Robo 1.0: The most prevalent form deployed today are where clients’ portfolios get built based on a short online survey. The portfolio construction strategies use underlying ETF baskets weighted between stocks, bonds, and gold. Here we see sustained innovation in the existing industry provided by incumbents, as well as lower-end disruption targeted to clients that are new to investing and prefer low risk.
Robo 2.0: A Hybrid model where artificial intelligence supports the advice and decision making of an adviser, which is particularly potent for estate and tax planning. We see this as a continuation of sustaining innovation by incumbents, but this is starting to introduce new market disruption by going into other non-traditional areas of wealth management, including “life-style/interest” portfolio fund construction and investment.
Robo 3.0: The Present-Future model, a fully automated service combining chatbots, automatic rebalancing, fractional ownership, nudging, back-testing, and strategies underpinned by Algos, Blockchain, artificial intelligence, and machine learning coupled with big data. We see this as new-market disruption. An example here is the ultra-high net worth client who wants to invest in digital currencies but is unable to get enough or any advice from his financial adviser in this investment area.
Evolution of the Technology
We predict that the technology and usage will evolve as follows:
Market Strategy and Potential Targets
We believe that target markets should be centered on two customer segments to “get the job done”:
1. Use Robo Advisers 1.0 (Robo 1.0) at the lower end while marketing it to new investors who would welcome Robo 1 as a self-service tool for its simplicity and flexibility.
In most emerging markets, the rising numbers of middle class and upper-middle class are looking for opportunities to invest; however, a lack of knowledge and access to information prevent them from investing.
For lower end disruption, simplicity is the defining character. The design of Robo 1 should be simple and easy to understand. Basic applications that are publicly available in the market like Bloom, Robinhood, Stash, and Acorns would serve investors’ needs in the lower-end market. For instance, Stash offers fund investments based on lifestyle preferences and interests, like clean water technology and social media companies. These applications are straightforward, simple to use, and readily adaptable and consumable by new customers. Investors can quickly learn how to invest — they can test the markets based on their interests by investing in a collection of companies that reflect their desires and goals accordingly.
2. Robo 2.0 and 3.0 (Advanced Robo) features would be categorized as sustaining innovation: the elements offered by the latter versions would augment rather than replace the human adviser. The characteristics of the Advanced Robo are more comprehensive, requiring the nuances to be analyzed by human advisers based on automatically generated recommendations.
Human advisers’ recommendations are supported by an in-depth analysis of market trends and potential risks. For the lower-end/new investor disruption, an Advanced Robo might not be appealing as it’s designed to serve higher-end investors that are cultivated by relationships. Based on the reaction of large incumbents who tend to manage high-end clients, Robo 1 will attempt to compete or concede.
The existing large incumbents managing high-end clients will also either compete or concede. They may concede and only decide to give human or robo advice on existing investment products. Or, they will add to their existing capabilities to increase innovation sustainability, keep their ultra-high net worth clients, and offer them augmented advice on new investment products.
In essence, a hybrid approach would achieve the optimum result for both customers and markets. It’s important to note that active intelligence from the device, through the network, and in the cloud can help to accelerate market adoption of this hybrid approach and model.
The table below provides an example of the Robo Advisor features that would be introduced:
|Client||Robo Adviser and Adviser Augmentation|
|Investment Product Education (Bonds vs Stocks, ETFs, Funds, Indexes),Goal Based Financial Planning||Portfolio financial planning tools; lifestyle/interest portolio construction, what-if and outcome analysis|
|Account Aggregation Tools||Client risk appetite and margin analysis|
|Tax Optimization Planning (e.g. Tax Loss Harvesting)||Client contact management tools|
|On-line account opening||Prospect engagement tools|
|Communication and Collaboration tools||Communication and collaboration tools|
|Access to new investment products and markets||Complex and nuanced portfolio construction and recommendations. New investment schemes (digital currencies|
A key component of any business plan is to effectively market the Robo Advisers as a service to different markets while staying keenly aware of the diversification of target markets and clients.
In the meantime, the business plan should also take into account the cost-effectiveness of deploying different versions of Robo Advisers based on the functions and features that the different versions offer. A great example of this would be to establish a separate booth or kiosk at the bank as a part of the marketing process. Bear in mind that while younger generations commonly use online banking, older generations still visit banks and conduct an in-person inquiries.
A well-defined market strategy will employ a hybrid approach that considers the nuances of the customers and markets, and leverages digital intelligence and connectivity for maximum reach.