Digital wealth management software can increase the financial services industry’s cost efficiency and enable it to reach a wider audience with custom services.
One of the most interesting and impressive ways in which financial technology (fintech) has been affecting the lives of regular people has been through the increasingly popular use of self-service robo-advisers. These are often seen by wealth managements firms as a way to tap in the proportion of the high net worth (HNW) sector of the population who do not have an adviser, estimated to be 36% of the HNW sector in the US (approximately two million people), according to a previous survey carried out by Harris on behalf of Nationwide Advisory. When considering those in the so-called “emerging” HNW sector, which includes the growing mass-affluent and younger generations, this is likely to be many times larger.
The use of “robo” or online digital platforms, algorithms and artificial intelligence can directly help investors automatically select appropriate asset classes and vehicles to put their money into, or alternatively back up financial advisers in providing a better tailor-made service.
As standalone robo-adviser startups have progressively multiplied in number to respond to greater demand for their digital asset management services, many financial institutions are seeing the future importance of this new wealth management software to their industry.
Even established asset management firms have been gradually rolling out robo-adviser options (e.g. Vanguard, Northern Trust) to provide direct services to affluent investors to use. This is greatly broadening the availability of financial advice, especially to investment savvy investors.
This ongoing process seems destined to fundamentally change the way the financial industry works. It will also dramatically affect how people manage their investments and interact with their brokers.
The basics of robo-advisory
In essence, robo-advisory is a form of digital private wealth management software that provides an automated solution intended to assist a traditional financial adviser and/or provide a digital advice experience directly to an investor. Robo-advisory software typically first uses a questionnaire to determine the objectives and risk tolerance of the investor.
The software then applies expertly created algorithms to a database of possible investment options in order to come up with suitable investment suggestions for a client. These increasingly sophisticated algorithms can include integrated cognitive computing methods like machine learning and artificial intelligence.
The basic business goals of creating and using robo-advisers are to lower costs, reduce the performance of mundane tasks, improve consistency among advice-giving staff, and increase the scalability of providing personally tailored investment services to clients.
They are also a useful tool for investment advisers to nurture and bring new clients on-board that may not yet be at a stage of requiring higher-tier investment advisory services or discretionary mandates.
Overall, robo-advisers should improve the customer experience, support advisers in making better decisions, and allow a broader range of clients to get investment advice.
Reaching the mass-affluent with automated robo-advice
Recent industry figures have shown that the growth of the mass-affluent segment is potentially the biggest opportunity for wealth management firms. Whether growing a business with retail investors, as they become wealthier, or whether finding new segments for HNW managers, automation and robo-technology can support growth plans for wealth managers.
The recent Credit Suisse global wealth report highlights this opportunity. It shows the biggest wealth segment globally to be the mass-affluent. It estimates that 499 million people (9.8% of the global population) have a net wealth amounting to between USD 100,000 and USD 1 million – a total of USD 140 trillion. Broadly speaking, one can see the growth of new money in the east, as young entrepreneurs develop wealth, and the shift of inter-generational wealth in the west as the populations stabilize and age.
The competition in this growing affluent market segment is increasing. It also brings into question some of the traditional industry operating models. Why are retail banks not able to step up and serve the mass-affluent segments? Why can HNW managers or private banks not scale their services to a wider audience? Is a universal wealth management model sustainable? The operating models of tomorrow need to be able to adapt to their clients’ ever changing fortunes and lifestyles – and potentially cope with four or more generations of family wealth.
Automation and robo-advisory have already made significant inroads into assisting financial advisers by doing repetitive work traditionally performed by humans. This advancement is already notably changing the way the wealth management industry operates. However, the real shift is still to come. The opportunity to democratize wealth management and better serve the mass-affluent is on our doorstep.
This change needs more than just automated processes and good algorithms. To help wealth managers take advantage of the democratization of wealth, we recommend a five-step recipe:
- Industrialize banking out of the cloud
- Embrace ecosystem API models
- Leverage technology for profound financial advice
- Harness data to gain insights
- Reinvent the customer journey
And perhaps beyond these five steps lies the digitization of assets themselves, as non-bankable assets, the erstwhile preserve of the rich, are made more accessible to the affluent investor.
Is investment education the key to wealth democratization?
Ultimately, the new technology will change the way in which many people interact with their investment firms, as people comfortable with modern technology will choose to use digital advisers for at least some of their investment needs.
Nevertheless, in many cases today, existing software algorithms benefit from having an experienced person looking over the proposed results and give the final go-ahead to a proposed investment. When artificial intelligence is adopted, algorithms are able to learn and adapt and so could provide a higher level of investment advice to support and enhance that presently offered by professional financial advisers.
The challenge then becomes one of whether end clients are really willing to adopt and trust automated advice and whether they are able to determine when the right time to use a professional adviser is – in an efficient manner. How competent are investors at understanding what the robo-proposal is really recommending them to do and the risks these investments entail?
One of the interesting developments in the wealth industry currently is the provision of investment education online direct to the investor. Built within the investment app, the investor is able to subscribe to snippets of investment courses to bring them up to speed on different investments vehicles, from basic equities through to complex derivatives and structured products.
Gamification with rewards and certificates can encourage them along the journey. Investment features and options are unlocked as they become more sophisticated and practised in their investment strategies. The opportunity to then interact with professionals, who can take over during vacation and busy periods, or indeed to leave the robot in charge, can also be offered.
Clearly, automated investment tools will not appeal to all. But for the tech-savvy and the younger millennial generations, such approaches could provide quick-wins on the road to building a presence in the mass-affluent segment.
Conclusion
The cost efficiencies and increased scalability of digital wealth management tools and robo-advisers – especially for younger investors more willing to interact with them – have already provoked widespread change in the personal financial industry.
But the major change is still to come. The combination of the market opportunity to better serve the mass-affluent and the technological changes, such as the rise of artificial intelligence, will undoubtedly have a dramatic impact on supporting existing financial advisers working in this field as well. It will ultimately lead to the democratization of wealth management itself.
Democratization of wealth management: a unique business opportunity
Learn more about:
- The four megatrends and what they mean for the financial industry
- How innovation, industrialization and individualization are key to mitigating structural margin pressure
- How the shift of wealth to a new generation will shape client needs
- Why the affluent segment represents a significant business opportunity for wealth managers