Wealth managers split on robo-advice

By Daniel Eriksson
11 April 2017

Robo-advisors are “arguably the most disruptive trend the wealth management industry has ever seen,” according to the latest WealthBriefing/SS&C Advent Technology & Operations Trends survey[1].

Should wealth managers feel threatened by these often low-cost providers, or embrace the technology and include it as part of their offerings? This is one of the biggest questions currently facing the sector.

And it’s one on which the respondents to this year’s survey are still divided.

Just 17% are already offering or actively pursuing robo-advice. By contrast, 39% state their firm is not interested in providing it. The remainder (44%) are waiting to see how automated advice develops—in large part due to the typically greater complexity of HNW clients’ financial affairs and how they can best be supported.

The regulatory question

The compliance landscape is a major consideration in a number of markets, notes the report.

Regulators, such as the UK’s Financial Conduct Authority, have broadly welcomed robo-advice as a way of solving the emerging “advice gap” affecting lower-value clients. However, the report points out that “many US robos have serious deficiencies from a UK regulatory perspective due to their minimalist (or even absent) risk-profiling, affordability and capacity for loss tests.”

Offerings may therefore have to adjust to meet each local market’s requirements.

With wealth managers unable to significantly streamline their regulatory responsibilities purely through digital technologies, in practice robo-advice may not turn out to be the “magic bullet” for profitability the industry hopes, the report adds.

And while the technology can dramatically reduce the costs involved in providing advice, razor-thin margins mean wealth managers may need to hold on to a client’s assets for many years before they can generate reasonable profits.

The personal touch

Clients may not be ready to fully embrace a robo world either. This is especially true during periods of market volatility, when clients often want the reassurance of talking to a human advisor.

There may also be limits as to “how far investors trust the new online-only brands springing up when larger sums are at stake,” says the report.

Wealth management has always been, and remains for the most part, a high-touch proposition. Clients have been prepared to pay a premium precisely for that personalized, hand-holding service.

Nevertheless, there is a tipping point, warns the report.

As robo-advice offerings become increasingly sophisticated, especially with more precise client segmentation and as platforms incorporate artificial intelligence and machine learning, “the balance could swing very much in their favour—particularly given the rock-bottom fees often on offer and the persistently low-yield environment that is making returns very much harder for even active managers to attain.”

A hybrid future?

In reality, the future of wealth management probably lies somewhere in between the traditional relationship-managed model and full automation.

But with the technology and service sophistication developing at such a rapid pace, and its future development likely to be exponential, just how wise the four-in-ten robo-sceptics identified by this study really are remains to be seen.

[1] Technology & Operations Trends in the Wealth Management Industry 2017, by WealthBriefing and SS&C Advent

To get a full copy of the report, visit “Technology & Operations Trends in the Wealth Management Industry 2017”.