EXCLUSIVE: Here Come The Robo-Advisors - The Tech Threat To Conventional Wealth Managers

Tom Burroughes Group Editor London 17 September 2014

EXCLUSIVE: Here Come The Robo-Advisors - The Tech Threat To Conventional Wealth Managers

A new term can be added to the wealth management lexicon: robo-advisors. In an exclusive report to this publication, researchers examine how technology is challenging conventional wealth managers.

Welcome to our new robot overlords.

Well, not quite. But a new term threatens to be added to the wealth management lexicon: robo-advisors. Such web-based wealth management providers offering automated investment services will become an increasingly important part of the industry, although still a small minority in the near and medium term, a new report says, as exclusively revealed by this publication today.

Global assets under management of robo-advisor services (firms such as WealthFront, Personal Capital and Betterment) will reach $14 billion by the end of this year, with 83 per cent of this money run by US-based firms. By the end of this decade, such advisors will run $255 billion of client money, according to a report by MyPrivateBanking Research, the Swiss firm. Its report is entitled Robo-Advisors: Threats and Opportunities for the Global Wealth Management Industry.

To put that figure into context, the report notes that conventional wealth managers in the US currently oversee around $5 trillion of assets, so the “robotic” element is still tiny, but not insignificant in potential.

“The robo phenomenon is here to stay and we believe there is good reason to expect robo-advisors to be highly successful as a class,” Francis Groves, senior analyst at the research firm, said in the report. “The opportunities and the dangers presented by robo-advisors to conventional wealth managers can be summed up in one single word, `technology’,” he continued.

“Our comparison of robo-advisors’ disruptive potential reveals that even though the robo-advisors are only just getting going as players in the wealth planning industry, their presence is likely to be the cause of severe turbulence for traditional wealth managers,” Groves said.

The development of such advisory services comes at a time when clients in some markets have been left “orphaned” as wealth managers have raised their investment minimums and fees to cope with rising regulatory costs. Technology platforms are seen as a potential fix for this issue. Another, perhaps more positive driver of technology change has been the rise of web-based platforms with which people, especially the younger generations, are more familiar.

The MyPrivateBanking Research report quantified the “threat potential” of 14 robo-advisor firms around the globe, using 13 criteria to rank its assessment. In top place is Wealthfront, followed in second and third positions by Personal Capital and Betterment, respectively. Out of a maximum score of 25, the first, second and third firms received 17, 15 and 14 points respectively.

The other firms measured were AssetBuilder; Jemstep; MoneyFarm; FutureAdvisor; Money on Toast; Nutmeg; Quirion; Rebalance IRA; Swissquote ePrivateBanking; Vaamo, and WiseBanyan.

The risks to conventional wealth managers are as follows:

-- Winning over clients, mainly among younger, more Internet-savvy individuals;

-- Popularising passive and indexing products as a sound basis for a life-time saving habit;

-- Using technology as their primary marketing tool with websites dedicated to client acquisition, and

-- Putting pressure on the fees of conventional players with low advisory fees, low fund fees and a strictly limited services range.

In total, the research report ranked the firms along 48 criteria; eight of the firms were in the US and the other six were in Europe (none in Asia). It said that at the core of its research were “in-depth studies of the publicly available interfaces of each of the 14 robo-advisors and interviews with senior management figures at several of them and as well as of conventional wealth managers”.

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