“Robo-advisors” have become a hugely popular new area of fintech in recent years. Many have even given their robo advisors human names. But, which roboadvisor is best?
As usual, big banks are relatively late to the game, but recently have begun launching their own roboadvisors.
A 2016 KPMG study estimated that robo-advisors will be managing an annual total of over $2 trillion by the end of 2020 equating to a compound annual growth rate of 68% over the five years.
“Robo-advisors” are seen as attractive by both banks and regulators as they have the potential to reduce the so-called “advice gap.” Financial advice is usually carried out face-to-face and, as a result, is relatively expensive. Only the relatively wealthy tend to seek advice and a large number of people with a modest amount of cash are left with no advice. This leaves them open to make inappropriate investments that won’t fit their needs.
Wealthier clients and sophisticated investors are also seeking out roboadvisors to reduce costs and increase returns as hedge fund managers are failing to beat low cost ETFs. Usually, any benefit that a human manager can impart in a hedge fund is eaten up by the extra fees.
Automated investment advice via robo-advisors has the potential to drive significant long-term change for wealth manager platforms, says Fitch Ratings. As long as investment performance and services meet client expectations, robo-advisors can offer substantial scalability and cost efficiency and allow for better segmentation of existing client bases. This matches up with the increasing popularity of using passive investing strategies amongst retail investors.
Robo-advisors may also assist wealth managers in addressing the new required fiduciary & regulatory standards for retirement accounts.
It is believed that the wealth management divisions of large banks will increasingly adopt the technology, following similar moves from traditional investment management companies.
Many household names in the world of finance have recently announced a robo-advisor platform to be rolled out in the coming months with the Royal Bank of Canada becoming the latest bank to offer an automated product concentrating on automated saving.
Given the rapid growth and popularity of automated advisory products, firms could risk losing clients to other firms or hamper their ability to grow market share if they do not launch their own robo-advisors. As such, robo-advisors could be an increasingly relevant technology requirement for wealth managers to defend market positions.
Robo-advising products differ between companies, but in general, offer digital portfolio management including automated asset allocation among a variety of passive investments, rebalancing, trade execution and tax management.
Some roboadvisors also offer 24/7 access to human advisors by phone to complement the automated services. Access to human advisors could increase the attractiveness of robo-advisors to wealthier individuals, who may require more hands-on interaction given greater financial needs and portfolio complexity.
The rise of robo-advisors is being driven by technological advancement and consumer adoption of financial technology, rapid growth in passive investment strategies and regulatory change. Robo-advisors could help enable retail wealth managers to more efficiently service their clients through tailored products that suit their needs.
The Money Pouch, a local start up with clients in Southeast Asia, saw this trend well before the big banks have and returns have been both consistent and steady since launch. Returns have been positive every month since launch.
The Money Pouch has an algorithmic trading team who has built over 400 trading systems for clients worldwide.
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