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The Rise Of Robo Advisors In Wealth Management

By Marcos Puccini on

The use of Artificial Intelligence (AI) has been on the rise worldwide. From home smart devices to the well-known Siri application on Mac gadgets, it seems that AI is everywhere. Even though the wealth management, and the finance field in general, follow more traditional paths, this doesn’t mean that they are excluded from this trend.

The latest integration to come out of AI is robo advisors. While some may be apprehensive of this sci-fi approach to finance management, these “robots” have the potential to transform your wealth management strategy.  More so, AI robots are increasingly being used by the millennial generation with the purpose of maximising their investment returns and tackling the diverse financial requirements effectively.

By utilising this fintech strategy, advisors and wealth managers can look forward to creating accurate financial plans for their clients while delivering a stellar service. In this article, we will unpack everything you need to know about robo advisors, how they work, and how your business can benefit from them.

Artificial Intelligence

Understanding Robo-Advisory

In the simplest of terms, robo advisors are software products that assist in managing investments without the input of a financial manager.  This software works off of an algorithm that drives financial planning services without much human supervision. For users to access this digital wealth management platform, all they will need is to access a web or cloud-based device.

Since 2008, the rise of robo advisors has taken the world by storm. At first, the main purpose of this fintech development was to rebalance assets as a way for investors to manage passive accounts. During this time, robo advisors were only used by wealth managers. Now, this software is available for clients to mimic the tactical strategies that they’d see with a human service. With this in mind, it also makes maintaining self-managed portfolios easier when facts and figures are automatically generated.

In addition to the notable technological growth since 2008, the total assets under management are predicted to seriously increase too. By 2020, Business Insider has estimated that robo advisors will account form $1 trillion of assets under management. This figure is further forecasted to increase to $4.6 trillion by the year 2022.

How They Work: 

So, how do these robots work? Typically, the robo advisor will collect information from clients regarding their financial situation as well as their goals and investment interests via online surveys. From here, the software will generate a list of appropriate financial solutions based on the carefully programmed algorithm.

After completing this online survey, this software can offer the following features:

  • Tax-loss harvesting
  • Goal planning
  • Account services
  • Portfolio management
  • Automatic asset investment
  • Investor profiling
  • Digital advice
  • Retirement planning

Furthermore, once the funds are invested, a client’s portfolio is automatically rebalanced to align it within the desired target allocation. This strategy has also proven to be a lower-cost approach to investments.

Benefits of Robo Advisors in Wealth Management

Being on the verge of such an important technological change, it’s fair that wealth managers want to approach robo advisors with caution. With the promise that AI brings, financial advisors can look forward to reaping the following benefits.

Robo Advisors

Digitally Transforms Your Competitive Advantage

The wealth management industry is a highly competitive space with more firms establishing themselves and adopting new fintech technology to stay ahead. On top of this, one can’t ignore the role that digital advancements play in investment management solutions. Whether you’re targeting young or experienced and savvy investors, providing easily accessible applications are key.

These days accessibility and ease of use are crucial in any type of service offering. With the use of robo advisors, clients can access their investment portfolio 24/7 and enter and exit positions with the click of a button.

Increases Profile Accuracy & Mitigates Fraud

One of the key factors that go into a successful financial firm is accuracy and compliance. When it comes to machine learning and cloud-based applications, the chances of deviations are notably less.

In terms of machine learning, client data can easily be collected to shape accurate alert detection and reduce fraudulent activity. When robo advisor technology is being accessed on a mobile device, data such as location and activity behaviour can be continually collected. When an irregular action is taken on the device, fraud systems can accurately and efficiently investigate where the transaction went wrong. On the human side, the greatest benefit of this is that it reduces the need for manual input.

Enhances Wealth Management Portfolios

By combining the best of human and robot financial advisors, clients can have access to a more accurate portfolio management system. Robo advisors run off algorithms that choose the optimum investment portfolio based on the client’s goals and financial situation. This makes for safer or more strategic portfolio options.

Of course, when it comes to any investment opportunity, that face-to-face contact is often preferable. However, what AI does is that it gives clients the groundwork to get their facts and considerations first before making a concrete decision. Not only does this contribute to success in gaining your client’s trust but it also increases the accuracy of investing their money.

Keeps Costs Low

From a client’s perspective, the main advantage of utilising robo advisors is that it provides a low-cost alternative to traditional investing. Through the elimination of human labour, rates and fees are therefore reduced. As per Investopedia’s findings, human financial planners generally charge a 1-2% rate with the potential to add on a commission-based fee. In contrast, using AI technology will affect the client’s ROI by 0.2%-0.5%.

Wealth Management

Final Thoughts

When looking at AI in general, there was a strong fear of robots taking over the world and jobs. However, the more comfortable we are getting with devices such as Siri, Google Home, and Alexa, AI is becoming a part of our normal lives. For wealth managers who want to stay ahead of the game and continue to provide a complete service for their clients, integrating robo advisors into their strategy comes highly recommended.

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