Robo-advice is a hotly debated topic in the fintech space. On the one hand it has opened up the low-wealth market, that was previously unservable, to be advised at lower costs and increased transparency. On the other hand, it is often a dressed down version of full advice, only considers a limited number of asset classes and, potentially, fails in risk categorization.
Robo-advice has become a catch-all term for digital progress in wealth management. Current robo-advice platforms are not very sophisticated and have difficulties to be economically viable on a stand-alone basis. However, it would not be wise to consider robo-advice a hype that will have no impact on wealth management. We believe current robo-advice solutions will evolve into robo-advice ‘10.1’, which will be much more complete in terms of customer profiling and asset allocation. This is not the time for complacency and serious investments by incumbents are required for them to remain relevant.
Important drivers of robo-advice demand are the shift in social-security schemes, especially the change from defined benefit to defined contribution pensions, the availability of technology that makes the advice process cheaper, and also a more general regulatory push. In many countries there is an advice gap, which implies that people who should be advised on their finances in order to prepare for the future are currently being left out because their wealth level is insufficient. The introduction of technology allows a larger part of the un-served to be reached and this is actively stimulated by several regulators.
However, reaching many people with cheap solutions might come at a price. In current offerings, people are not receiving the level of advice that they should be receiving. Besides that, there is too much focus on pricing. This is too one-dimensional, as it is more important to present customers with a complete view and proper advice, taking into account many different aspects of the financial planning value-chain, than to be the cheapest.
We expect the potential market size for robo 10.1 to be around USD 30 trillion in assets under management (AUM) by 2025. This compares with estimates by the market of between USD 5 and 10 trillion today versus current AUM of USD 100 billion. We see two important considerations lacking from current estimates. The first one is that robo-advice offerings as we see them today add little value to the top of the wealth pyramid and are, therefore, not used by this customer group. We think that robo 10.1 will be able to add value to a much larger part of the wealth pyramid, which will make the total addressable market much larger.
Besides our view that robo-advice will become more sophisticated and attract a larger customer group, we also believe the robo-solutions will be used more often in a B2B setting. We see potential for automated advice to be used as an input source for traditional advice. The combination of man and machine was dubbed cyborg-advice in our previous whitepaper ‘The future of asset management’ (2016). Once the proliferation of technology progresses from a B2C setting into a B2B offering, the addressable market will grow with it.
There are several scenarios for the development of robo-advice. We believe the scenario of stand-alone growth is least likely. We think a lot of platforms will merge with financial institutions that own the customer database, as acquisition costs are a make-or-break input in many models. We see several existing companies such as Schwab, Vanguard and Fidelity integrating robo-solutions into their current offering. We expect technology providers and the tech-savvy asset and wealth managers to come out as long-term winners. Those that are still complacent about all technological changes in their industry are bound to be challenged.