united kingdomen
Robo-advice is not a hype that will go away

Robo-advice is not a hype that will go away

02-05-2017 | Research

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.

  • Patrick  Lemmens
    Patrick
    Lemmens
    Portfolio Manager
  • Jeroen van Oerle
    Jeroen
    van Oerle
    Portfolio Manager

Speed read

  • Although current robo-advice isn’t sophisticated, it isn’t a hype that will go away
  • We expect robo-advice to evolve into a more complete proposition
  • Incumbents cannot be complacent and need to invest
Stay informed on our latest insights with monthly mail updates
Stay informed on our latest insights with monthly mail updates
Subscribe

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.

Infancy does not justify complacency

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.

Potential market size is large

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.

Stand-alone advisers will have a hard time

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.

Subjects related to this article are:

Disclaimer

Please read this important information before proceeding further. It contains legal and regulatory notices relevant to the information contained on this website.

The information contained in the Website is NOT FOR RETAIL CLIENTS - The information contained in the Website is solely intended for professional investors, defined as investors which (1) qualify as professional clients within the meaning of the Markets in Financial Instruments Directive (MiFID), (2) have requested to be treated as professional clients within the meaning of the MiFID or (3) are authorized to receive such information under any other applicable laws. The value of the investments may fluctuate. Past performance is no guarantee of future results. Investors may not get back the amount originally invested. Neither Robeco Institutional Asset Management B.V. nor any of its affiliates guarantees the performance or the future returns of any investments. If the currency in which the past performance is displayed differs from the currency of the country in which you reside, then you should be aware that due to exchange rate fluctuations the performance shown may increase or decrease if converted into your local currency.

In the UK, Robeco Institutional Asset Management B.V. (“ROBECO”) only markets its funds to institutional clients and professional investors. Private investors seeking information about ROBECO should visit our corporate website www.robeco.com or contact their financial adviser. ROBECO will not be liable for any damages or losses suffered by private investors accessing these areas.

In the UK, ROBECO Funds has marketing approval for the funds listed on this website, all of which are UCITS funds. ROBECO is authorized by the AFM and subject to limited regulation by the Financial Conduct Authority. Details about the extent of our regulation by the Financial Conduct Authority are available from us on request.

Many of the protections provided by the United Kingdom regulatory framework may not apply to investments in ROBECO Funds, including access to the Financial Services Compensation Scheme and the Financial Ombudsman Service. No representation, warranty or undertaking is given as to the accuracy or completeness of the information on this website.

If you are not an institutional client or professional investor you should therefore not proceed. By proceeding please note that we will be treating you as a professional client for regulatory purposes and you agree to be bound by our terms and conditions.

If you do not accept these terms and conditions, as well as the terms of use of the website, please do not continue to use or access any pages on this website.

I Disagree