FinTech companies seem to be in the ascendency, as they look to disrupt monolithic financial services firms by taking advantage of the latest IT developments and a new breed of tech-savvy investors.
Recent research from PwC showed 95 per cent of banks feel they could lose important parts of their business to standalone FinTech competitors. The usurpers are also optimistic about their fortunes; FinTech respondents predicted they will steal away 33 per cent of incumbents' businesses.
"Automated advice will likely become a standard expectation for the mass-affluent and mass-market segments."
Robo advisers are among the FinTech solutions that are currently gaining momentum both in the US and the UK. Rather than talk to human advisers, customers digitally input information about their wealth management needs via a tech platform. The data is then fed through an algorithm that automatically formulates portfolio allocations and recommendations based on their risk-return profile – no face-to-face meetings necessary.
Last year, Deloitte noted that assets under management with robo advisers reached $19 billion (£13.45 billion) at the end of 2014. This represented a 65 per cent rise over an eight-month period. Admittedly, the figure pales in comparison to the $25 trillion of retail investable assets in the US. However, the distributor landscape is evolving, with bigger names and more investment entering the robo adviser space as demand for these services increases.
What are the advantages and disadvantages?
Automating wealth management has upsides and downsides. For example, the cost of digital robo advice can be dramatically lower than traditional in-person services. In fact, some robo advisers are free to use, which opens up financial advice to a wider range of consumers who may not have access to professional guidance.
The concept is also proving popular with Millennials and, presumably, will appeal to subsequent generations once they begin contemplating their wealth management needs. Younger investors who are fully immersed in the digital world are especially eager to take advantage of anywhere, any time investment services.
A Salesforce survey from last year showed just 49 per cent of Millennials believe financial advisers put their clients' best interests first, whereas 72 per cent of baby boomers said the same. Furthermore, 89 per cent of Millennials emphasised the importance of modern tools when selecting firms to oversee their financial planning.
Despite the benefits, some industry experts feel the rise of the robo adviser has coincided with a fortunate upward trajectory in financial markets. In other words, people may be less inclined to trust a machine to organise their wealth when the markets are in free fall.
Tobin McDaniel, president of Schwab Wealth Investment Advisory, told the Financial Times: "Without access to a professional when the market gets choppy, there's a risk that some investors might make emotional decisions that they'll regret later."
Looking to the future
Robo advisers are still in a nascent phase, which makes it difficult to predict how popular these services will become in the future. There is certainly a gap in the UK market for consumers with relatively small investment pots after banks withdrew financial advice for much of these customers following the Retail Distribution Review.
Deloitte's research also indicated that many established wealth management firms are now investing heavily in big data and sophisticated analytics projects. Progress in this area would allow robo advisers to expand from portfolio allocation and simple investment products to more personalised services for high-net-worth individuals with complex needs.
"Digital, automated advice will likely become a standard expectation for the mass-affluent and mass-market segments," Deloitte stated. "Robo advice is here to stay and poised to evolve into much more disruptive and wide-ranging forms of advice. All wealth management firms should take notice."
At Affinity Capital, we're intrigued by some of the FinTech innovations currently helping investors, and we'll certainly be keeping an eye on the development of robo advisers over the coming months and years. For now, the jury is still out on whether these services will enjoy long-term success.