Robo-Advising and What it Means for Investors and the Financial Services Industry

In the beginning of November BMO bank announced a plan to launch robo-advisory services in their branches, providing online portfolio assessment and management for clients. According to BMO, their intention is to implement the changes by the end of 2015.

Robo-advising is becoming an increasingly prevalent topic of discussion, raising the question: what does emergence of robo-advisers mean for investors and the financial services industry?

Robo-Advisers

Robotic advisers are a new type of automated financial advisers that are gradually becoming more available to the general public. Robo-advisers help investors with their portfolio management: they are designed to analyze the situation through client surveys and suggest investment strategies that would work best for that situation. This software-based assistance aims to create a clear, transparent representation of the available options, fees and comparative performance data.

Robo-advising is growing rapidly in Canada, with ten independent platforms currently available. With such rapid growth, it’s important to consider the potential benefits and drawbacks of being advised by the software.

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Benefits and Disadvantages

There are several advantages of robo-advising:

  1. Cost: as is usually the case with technological advances, the introduction of software-based investment management can reduce the cost of advising services for the investors. When using robo-advisers, the fee drops from 1-2% (a standard adviser fee) to .0.15-0.35%, which makes investing more affordable. After all, 1% can amount to quite a large chunk of your money when you’re investing large amounts.
  2. Transparency: with robotic advisers, clients have a better idea of the breakdown of the services that are offered and the fees that they have to pay – which is a big plus when you are budgeting for your investments.
  3. Convenience: because of technological advances, clients have increased options, including easier access to advising (in terms of scheduling appointments, communication, etc.) and better tracking of investment decisions through robo-advising platforms. They also have an option to place the settings of the investments and leave them on the automatic mode. (This is convenient for those users who would like to invest, but do not necessarily want to be continuously involved in those investments)
  4. Availability: cheaper costs and technological advancements make investment advisory services more available to a younger generation of clients. Furthermore, a smaller (or nonexistent) cap on the minimum investment gives less wealthy clients an opportunity to start investing as well.

At the same time, robotic advisers also have noted disadvantages compared to regular advisers:

  1. Relationships: some clients still prefer to have interactions with the people instead of the machines: they may be unsure of their investment plans and strategies, and may prefer to discuss them with someone who has the experience and expertise in the area. Human advisers also work better for less technologically-savvy users.
  2. Connection: human investors not only analyze the survey data, but can help clients align your investment goals to their dreams and future plans. They do not only focus on the numbers, but help to translate those numbers into tangible experiences, connecting them with the personal goals. With robo-advisers, the client has to figure this part out on their own.
  3. Adjustments: with advisers, clients have more flexibility to adjust their investments if they have a complex financial situation or a large portfolio. This is especially relevant for larger investments, where the risks are also higher.

How Will Robo-Advisers Change the Financial Services Industry?

The emergence of robo-advisers may, in fact, change the investment industry – but it doesn’t mean the changes will destroy the livelihood of regular advisers. In fact, many advisers remain optimistic, saying that automation does not pose a threat – it will be of help. Becky Wong, CFP, an independent financial planner with over twenty years of experience noted that

“while there is certainly a market for robo-advisers, (primarily younger clients who tend to be DIYers), there are still clients require face-to-face interaction and personalized advice in order to be comfortable making financial decisions. However, I do like the idea of robo-advisers introducing a larger number of consumers to the benefits of financial planning.”

Robotic software and other technological advances can benefit advisers along with users. Technologies can help with data and risk assessment, while in-person advisers maintain relationships with the clients and provide advice based on the clients’ goals.

Secondly, robo-advisers will push human advisers to be more efficient because of perceived competition. For instance, advisers are likely to become more effective with communication, such as offering ongoing online support or longer customer service hours. Robo-advisers can also diminish the amount of scams in advising, and encourage advisers to focus on the services they provide, rather than the products they want to sell to the client.

Thirdly, new technologies can, in fact, increase the number of investors in general. Robo-advisers can attract people who were previously not able to afford advising. Potentially, when they grow their revenue, they could choose to switch to in-person advising for more complex assessments.

Summary

We have yet to see full effect robotic advisers will have on the financial services industry. It does seem that robo-advisers offer various benefits to the clients; however, they still have several drawbacks compared to in-person advising. The choice of advising depends on the person’s goals and preferences. If clients are comfortable with technology, willing and able to align their investment and life goals, and want to make smaller investments, a robo-adviser is a more suitable choice for them. If, on the other hand, they prefer human interaction, are investing large amounts of money or have a complex financial situation, and want to be strategic with their money, in-person investing is a more suitable choice.

 

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