With the meteoric rise of robo-advisors in the wealth management field, it is unavoidable for advisors to feel intimidated, especially when facing a generational shift in assets to a younger and more technologically advanced generation. Perhaps the machines are doing some things right that attract so many new users and continue to be a compelling alternative to human advisors. So why not take a proactive step here by learning about how they operate and implementing good practices?
Robo-advisors are wealth management services that use computer algorithms to build and manage investment portfolios. These automated advisors bring a lot of benefits to the table, and one of the key advantages is the low management fees. They charge lower fees than conventional financial advisors at around 0.25% to 0.5% of investors’ assets under management (AUM). Besides the appealing fees, robo-advisors also provide investors with the convenience of opening an account at any time or putting money in to invest starting at any amount.
Robo-advisors offer a wide range of common services such as automated investing, automatic rebalancing, tax-loss harvesting, personalized financial planning and goal-based accounts. They are a great option for investors who want a simple way to grow their wealth or if they want to “set it and forget it”, and be passive in some part of their investments.
Since their debut in 2008, robo-advisors have risen to prominence among the younger generations, managing $460 billion in assets in 2020, an increase of 30% compared to 2009. The industry is anticipated to expand even further in the future, with some analysts predicting it will become a $1.2 trillion industry by the year 2024. However, experts claim that machines can never entirely replace human advisors in the future. Conversation engagement and the level of personalization when it comes to managing more complex wealth portfolios are just some of the elements that are irreplaceable. That said, wealth managers always have room for improvement when it comes to providing investors with the best advice and customer service.
Proactive communication is the foundation of a strong advisor and client relationship. However, robo-advisors’ biggest disadvantage is the lack of interaction with their investors. Even though the whole mechanism of robo-advisors is designed and overseen by humans, it is difficult to verbally communicate with robots if the investors go through any changes in their financial plans. According to Meg Bartelt, certified financial planner of Flow Financial Planning, they aren't as great at helping you and your family diagnose your personal financial problems and opportunities for improvement.
“Where a human financial advisor really thrives is addressing the other 90% of your financial life,” she says. “The big questions like how to buy a house, a car, quit your job and start your own business, or have a baby in the next five or 10 years.”, Bartelt says.
Considering this, advisors need to step up their communication game by initiating and engaging in conversations with their clients from time to time. This is a trust business, and what says trustworthy more than being available to clients through thick and thin?
Investors are dealing with market volatility, increasing inflation, interest rates and a high risk of recession, this is a perfect time for advisors to reach out and reassure their clients. “People want to check in, so don’t wait for them to call you”, says Jackie Porter, president and founder of Team Jackie Porter with Carte Wealth Management.
One of the most valuable features of robo-advisors is the ability to meet every client’s needs, from the required amount to start investing, to risk tolerance completely seamlessly. This is because robots use algorithms to tailor investment portfolios to each individual investor, and with the help of technology, it is highly efficient to come up with a portfolio after just a few short questionnaires.
At the same time, advisors may not be using algorithms to customize portfolios, but they should always strive to act in their client's best interests. Each client has a different set of goals and values when investing, and catering your services to help them meet those goals is one of the strongest drivers of trust.
In fact, one of the top considerations for wealth managers is to adhere to compliance and regulatory requirements when collecting clients’ data. Investors need to be comfortable sharing large volumes of information and trust that their wealth managers will only use it to act in their best interests. This level of personalization and dedication cannot be acquired by machines.
The takeaway lesson here? Find ways to respect fiduciary standards while making your client feel like you're building them a custom solution.
While it’s hard to compete with robo-advisors’ pricing rate at roughly 0.5% of AUM, transparency in how the services are priced will encourage investors to opt for a more conventional way of investing.
As a matter of fact, one of the key megatrends among investors transitioning into this new era of wealth management is the expectation for transparency regarding pricing structures. On top of that, this is also pressured by regulators across jurisdictions, as they are adopting more fiduciary rules requiring more fee transparency and scrutiny. Even if lower fees are not the top priority for some investors when choosing a provider, some of the richest clients are still disturbed about fee structures. According to the Wealth and Asset Management 4.0 report, only about a third out of every 10 investors understand how their wealth advisors are compensated.
“I’m going to look for transparency. The younger customers—I shouldn’t say millennials, because they’ve gotten to their 40s—now want to understand what exactly happens behind the scenes for them to trust that platform,” says Vinod Raman, VP and Director of Product and Operating Unit at Stash.
Perhaps the biggest strength of robo-advisors is how easy they make it to embark on an investment journey. All investors have to do is sign up, fill in a short survey; and that's it, they can start putting money in to invest in as fast as 15 minutes. Needless to say, it provides clients with ultimate convenience and accessibility.
This is the point where legacy systems are dragging wealth management firms behind. When we interviewed Gillian Kunza, CEO of Designed Securities, she told us, “When we’ve talked with other advisors, we know that with other systems, an account can take upwards of two weeks to open”. The gap between 15 minutes and 2 weeks is definitely not setting firms up for success when attracting and retaining new clients. On top of that, having to key in repetitive information increases the risk of human error or missing information. This can lead to more time and money wasted. In some cases, the cost of onboarding a new client could be as high as $25,000. (According to Forrester’s research).
Fortunately, wealth management firms can now close the gap by digitizing their whole onboarding process with the help of technology. As a matter of fact, Mako Fintech makes it so that advisors can now open an account at a carrying broker in just only 15-20 minutes.
“Work with them, not against them” is probably the best motto for wealth managers in this digital age. The star of the show here are the clients, and offering them the best service possible, with the help of technology, is something that financial advisors should always strive for.
Using data gathered from AI tools, it is now possible to obtain a better quantitative analysis of how products and services are performing in terms of generating revenue, reducing loss, improving customer service and mitigating risk. Given the coming changes and the need to adjust products to suit the next generation of clients, these insights will be invaluable for the wealth management industry.
“As the demographics of the wealth management industry evolve, changes to longstanding practices are being made. Savvy wealth managers will adopt the use of AI-augmented tools to free their time from mundane tasks and enable them to solve more critical and complex problems – which is where their real competitive advantage lies,” says Monica Hovsepian, Global Industry Strategist at OpenText.
At the end of the day, it’s totally up to investors to choose their suitable provider, but closing the gap between conventional financial advisors and robo-advisors will definitely help opting for human advisors a bit more apparent. Technology is rapidly advancing and will continue to do so in the future. It’s now high time for providers to embark on the digitization journey and transform their businesses, all for the better.