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Rise of the robo-adviser: Traditional finance firms need to embrace change to keep pace

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According to a Financial Times poll in 2015, four-fifths of senior asset management staff expect the fund market to be disrupted by an outside participant in the same way Apple upended the music industry when it launched iTunes, with 79 per cent fearing they will face direct competition from a non-traditional entrant to asset management.

Enter the robo-adviser! And its popularity is going to explode even more, if projections from A.T. Kearney are in the right ballpark. Assets under management (AUM) by robo-advisers are estimated to increase 68 per cent annually to about $2.2tn in the next five years. 

Furthermore, Buck Consultants head of corporate solutions John Deacon said he believed there could be a place for robo-advisers in the corporate market in the future. He explained: “There is potentially an attraction in using an avatar as it will help employers manage their risks. Why? Because employers can control what that avatar is going to say.

“If you deploy 100 advisers to 50,000 employees you are going to have 100 different conversations going on – the questions might be exactly the same, but you’re probably going to end up with 100 different answers. If you use an avatar, however, you are going to provide precisely the same answer.”

Many seem to have hopped onboard the same conclusion. Charles Schwab, which garnered $5.3bn in AUM since it launched, claimed it asked staff to work longer hours to cope with a one-third increase in calls from customers since December 2015. 

“There are times when people just want to talk – even if it’s just to reinforce that they’re doing the right thing,” said Tobin McDaniel, president of the robo-service. “Without access to a professional when the market gets choppy, there’s a risk that some investors might make emotional decisions that they’ll regret later.”

And while many investors and entrepreneurs have flocked to use robo-advisers, its rise in the market is intriguingly being driven by young investors. According to Alexey Sokolin, partner and COO of Vanare, despite their age, this generation is far more risk-averse and financially conservative than Gen X and baby boomers. 

“Our formative experience with financial markets is bookended by crashes,” he said. “Growing up during that time meant witnessing 50 per cent negative-return months and rising unemployment. Not only did millennials lose their first paychecks when investing in stocks, but they also lost their first jobs, while also paying off record-high student debt. 

“The financial advice industry is built on trust. A personal relationship with a branded, storied financial firm is the way that most wealth planning happened for many generations. However, things are different for this generation. Because of this formative experience during the 2000s, trust in financial institutions was simply not there. But there is one ‘institution’ that not only remains a trustworthy companion but has grown and improved over the last 20 years for millennials: personal technology.”

He claimed that while many assume millennials are disconnected from each other, it could not be further from the truth. “Each individual has a personal brand (Facebook or Instagram) and statistics on usage and engagement (‘likes,’ Google analytics). Given this daily practice, millennials are experts in telling the difference between authentic and constructed image,” he explained. “Robo-advisers are the application of personal technology to the financial advice industry.” 

The traditional financial industry generally does not have a great solution for smaller accounts, he suggested, further stating that financial advisors normally have a limited amount of time, and it is hard to scale a business model serving a few low-asset clients. So millennials created a technology solution that is personal, customisable and accessible.

Additionally, robo-advisor firms are relatable and empathetic. Even though technology is used to serve thousands of clients, the branding and vision is human. 

“The industry is undergoing a $60tn intergenerational wealth transfer, with millennials standing to earn and inherit these assets over the next 20 years,” he said. “To continue playing the role of trusted financial counsel, advisors will have to be patient and flexible in embracing change. The key to a successful intergenerational practice is to engage young and mass-affluent clients on their own terms by leveraging the language and tools they use in their daily lives.

“These younger clients are simply seeking solutions to the same old problem of achieving personal and financial goals. The good news for traditional advisors is that there are sophisticated private-label robo-advisors that they can easily adopt in their current practice. The right solution will include an intuitively designed website, online account opening, proposal generation, trading, performance-reporting, billing and advisor-facing dashboards in a modern package.

“Now is a unique moment in the wealth-management industry and an incredible opportunity for firms to connect with millennials. Advisors do not have to compete with next-generation technology, but instead can leverage it and use it in their daily business.”

Firms that take the leap will become part of a millennial’s personal technology ecosystem.

Image: Shutterstock

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