The unstoppable rise of robo-advisors

It’s a financial world: The unstoppable rise of robo-advisors

The unstoppable rise of robo-advisors

The Financial Times estimates that the market for funds
advised by hybrid robo-human services will grow to $16.3 trillion worldwide in
the next nine years. According to Swiss financial research company,, pure robo-advice has jumped from $19 billion in 2015 to
$43 billion in 2016. The rise of the robo-advisor appears to be unstoppable and
is key to the opening up of wealth management to the mass market. There are a
number of reasons why this is happening and why now.
interest rates
With interest rates at record lows, virtually zero or
negative in many parts of the world, savers are looking for places where they
can get a return on their money as an alternative to putting it under their
mattresses and seeing rising inflation eat away at the value of it faster than the
With cheap funding available from the central banks
the high street banks, who have traditionally used savings accounts to fund
their lending activities, are no longer interested in competing for consumer
savings. The days when the likes of ING Direct were fighting for savings at
attractive rates have gone.
disappearance of affordable investment advice
Governments have introduced legislation such as the
UK’s Retail Distribution Review that was designed to raise the quality of the
advice that customers received from their financial advisors and to make the
charges paid to advisors far clearer. This well intentioned regulation has
resulted in the disappearance of affordable wealth advice for the mass market
from the high street. The banks, many insurance companies and Independent
Financial Advisors (IFAs) deciding that the cost involved in training the staff
to meet the new standards for the significant reduction in the revenue from
selling investment products (as both upfront and trailing commission, largely
invisible to customers, was banned and replaced with explicit upfront fees) was
simply not worth it.
demise of the star active fund manager
In a rising market it is relatively easy to appear to
be a successful fund manager, particularly when your low risk investment
strategy is largely to shadow the indices in the markets you are focused on. Even
the star performers who have been hugely successful in the past have been seen
to be human – the challenges that Antony Bolton had with his Fidelity China
Special Situations trust and Neil Woodford has with his Patient Capital Trust
illustrate how difficult it is for active funds to consistently perform. Increasingly
and particularly during periods of economic uncertainty and turbulence in the
markets it has become evident that the majority of active fund managers fail to
outperform passive index trackers, even more so when the charges for these
funds are taken into account.
emergence of Exchange Traded Funds
In 1993 the first Exchange Traded Fund was launched
and there are now several thousand of them. An ETF is a marketable security
that tracks an index, a commodity, bonds or a basket of securities like an
index fund and because it is traded on a market is priced throughout the day
unlike mutual funds. Amongst the reasons that the emergence of ETFs is
influencing the rise of robo-advisors is that they generally have very low
costs, they have a low entry price (buying one share is possible) and because
they operate like an index it is very easy to automate the management of the
All robo-advisors have been built around ETFs as the
core funds in the portfolios that they recommend to their customers.
trust in computer generated recommendations
With consumers increasingly trusting personalised recommendations
from the likes of Netflix, Spotify and Amazon there is far more acceptance that
artificial intelligence can be relied upon. This is further boosted by the
considerable loss of trust by consumers in the people within the Financial
Services industry following scandals such as the mis-selling of Payment
Protection Insurance (PPI), fixing of the LIBOR and FX markets and the 2008
market crash.
low cost and availability of supercomputing and the cloud
Without the dramatic drop in the cost of
supercomputing and the ability to deliver it over the cloud the sort of
services that robo-advisors can offer would not be possible. The Independent
Financial Advisor used to have the advantage of having information superiority
and exclusive access to financial models – this has been taken away by the pervasiveness
of information and the ability to deliver supercomputing to mobile devices.
Algorithms that used to require a Cray to process can now be delivered via the
cloud to an iPhone, tablet or android device. This allows the ordinary person
through their robo-advisor to take advantage of sophisticated tools such as
algorithmic trading.
ability to process structured and unstructured data in real time
With high volatility in the markets and with 24×7
newsfeeds then the ability to process both structured and unstructured data,
including sentiment analysis, all in real time reduces the risk involved in
investing in the market. This provides the robo-advisor firms using AI to flex
the recommendations and portfolios in real time.
With the potential size of the market it is likely that
not only will the large US players bring their offerings to Europe but others
from within Europe will enter the market. This will be thorough a combination
of three ways:
Banks and asset managers building their
own robo-advisors using platforms that can manage structured and unstructured
data in real time such as SAP’s HANA, advanced analytics tools, AI and cognitive
Partnering with an established robo-advisor
platform provider. This could either be on a white labelled basis or leveraging
the robo-advisor brand. Fidelity originally did this with Betterment until it
decided to build its own solution. In the USA BBVA and RBC are both partnering
with Backrock’s FutureAdvisor.
Fintechs entering the market in a similar way
to Moneyfarm or just like Solarisbank
has done for banks offer robo-advise as a service to business both within and
outside financial services e.g. retailers
significant threat to the relationship with mass affluent and wealth management
The low cost to consumers of buying a funds portfolio using
robo-advisor technology is significantly increasing the market size for what
has traditionally been seen as wealth management. With many banks and insurance
companies abandoning the provision of financial advice to the      mass affluent it
is also providing a significant opportunity for new technology enabled players
to enter the market. This is a significant competitive threat to established
players who persist in only using traditional channels. It also threatens the
relationship banks have with mass affluent customers and risks relegating banks
to simply providing low margin transactional services.

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