Deloitte, a global financial services firm, has released a report investigating the rise of “robo-advisors” and the threat they pose to traditional wealth managers and financial advisors. The report quantifies the explosive growth that the leading eleven firms have seen during 2014, with assets under management rising from around $11.5bn in April to end the year at $19.0bn.
Robo-advisor assets under management grew 65% during the course of 2014.
Robo-advisors provide technology-driven investment solutions which have been tailored to meet clients’ individual needs. Using information gathered from the client through online questionnaires, firms such as Wealthfront, Personal Capital and Betterment, can provide an asset allocation suggestion that can be implemented through low-cost exchange-traded funds (ETFs). The resulting portfolio is designed to consider the individual’s return requirements, appetite for risk, and behavioural traits.
The growth rates may be impressive but according to Deloitte, “these new market entrants are still nascent and represent a trivial amount relative to the $25+ trillion retail investable assets in the United States. Their lack of distribution has likely contributed to difficulties in reaching a large number of potential customers. But this may be about to change with large wealth management firms now joining the fray, including Charles Schwab and Vanguard, bringing both investment dollars and distribution to the robo-advice space.”
Deloitte believes the wealth management industry is likely entering a period of significant disruption. While high-net-worth clients may continue to require the individual, personal touch of a human wealth manager, the large portion of affluent investors could benefit significantly from an intelligent, automated service. A low-cost wealth management solution, particularly to a demographic who are more than comfortable handling their finances in an online environment, is an attractive proposition which can lead to significant savings over long-term horizons.
The march of the robo-advisors has been led by the US, but there are winds of change in the European market. Nutmeg was the first provider to bring a robo-advisor product to market in the UK. Their innovative website provides the investor with portfolio options based on their risk preference, which they determine through a behavioural questionnaire. Large industry players look poised to make an entrance: iShares has recently announced partnerships with IG Group in the UK and InvestBanca in Italy to launch a range of ETF-based portfolios. There are also a number of start-ups developing online wealth management solutions for the UK market; ETFmatic and Zen Assets are two providers who are aiming to bring such offerings to investors soon.