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 Cosima F. Barone
Board Member of GSCGI
Founder & CEO – FINARC SA
ROBO-ADVISORS: An evolution, but not extraordinary!
According to a recent article Robo-Advisors Top $1 Trillion in Assets... published by Barron's, the Advisors sector would control around $50 trillion, of which only $1 trillion would make the 'robo-advisors' segment happy. These figures are based on a recent study by Condor Capital Wealth Management, which has tracked the evolution of the financial robotics sector since its inception.
The evolution of robotics in financial advice has highlighted the high barriers to entry in the financial sector, characterized by high minimums and fees, and the resistance of traditional asset management companies. However, the wave of robo-advisors turned out to be less disruptive than predicted when Betterment and WealthFront (acquired by UBS)--the two pioneers of the sector--were launched in 2008, during the 2008-2009 crisis.
The promise of robo-advisors generated big interest in the wake of the financial crisis. Investors saw their savings plummet. Many of them needed to rethink their asset allocation and wanted help in choosing funds, without having to pay fees to Financial Advisors, which very often encompass broader financial and tax planning objectives. Moreover, many Financial Advisors often don't want to deal with these smaller clients.
In addition, index investing was booming, as was the prevalence of the smartphone. What's more, the democratic aspect of this type of investment management was quite relevant. How could anyone not be interested in a product offering a complete investment plan for a modest sum, and easy to manage via the web or a digital application? All the more so as (1) initial investments and minimum accounts are very low, and (2) most robots invest in very low-cost index funds and charge an average 0.35% management fee.
However, after a few years, these start-ups have had to face up to some realities, the most important of which are: (1) to remain 'pure digital solutions', and (2) to remain independent.
The start of robo-advisors in 2008 was so disruptive that Vanguard, Fidelity, Charles Schwab, and other major financial services companies launched their robo-advisors with great success. So, in the early days, the banking and wealth management sector had to realize the need to adapt to a more digitally savvy clientele.
Years later, the robo-advisor industry must have quickly realized that investors, even younger ones, want to be able to talk to someone when making important decisions about their money. So, for example, Fidelity has integrated its pure-digital investment management service into its 'hybrid' robo-advisor, underlining the fact that the pure-digital offering doesn't stand much of a chance of surviving, with the possible exception of Betterment, which is striving for financial independence.
Generally speaking, robo-advisors' lofty ambitions have been scaled back. Undoubtedly, it is at present impossible to predict the outcome of the David-Goliath confrontation ($1 trillion-$50 trillion).
However, we can see that the highly professional offer from financial advisors particularly concerned with their clients' interests remains an undeniable asset in this human-robo advisor confrontation.
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