Robo-advising, using computer algorithms to handle some of the rudimentary tasks in managing investors’ accounts such as portfolio rebalancing and investment selection, is gaining in popularity. Robos can benefit both the investor and the advisor and will predictably advance in sophistication over time as they increase in function. A recent model that has developed involves the pairing of the human advisor with its “robotic” partner. KCRA’s financial services research team spoke with Uday Singh, a partner in the financial institutions practice at A.T. Kearney about this development and the effects of robo-advisors on the financial services industry.
KCRA: What do you think will be some of the short-term industry effects of robo-advice–for instance, some of the positive or negative impact on other channels such as call centers and broker support services?
Singh: In the short term we expect to see more anxiety than actual impact. Human advisors in different channels, whether they be contact center based or branch based will feel uncertain and anxious that robo-services are a threat. In reality, however, the impact over the next couple of years will be small and even in five years, the total financial assets managed by robo-advisors will only be 5 percent. This is a significant number, showing that the concept has traction in the market. But the short term should not impact the human advisor.
Our research does show that consumers most interested in robo-advice tend to be those that have a self-directed investment style. It is an opportunity for firms serving this segment to round out their offering by providing robo-advisory services. In fact, we found 66 percent of those who can be considered first wave adopters identify as having mainly a self-directed investment style.
KCRA: The combination of robo and human advisors (noted in the WSJ coverage on the A.T. Kearney robo research) may be a stronger combination than the sum of its parts. What’s your view on this and how might this combination benefit investment firms?
Singh: Robo and human advisors together are going to be a winning combination. Ultimately there will be clients who will want to pick up the phone and talk to a person on the other side who can provide them with counsel and advice. Industry practitioners with whom I speak say this human touch will be very important in a down market. We have only seen good times over the recent past 3-4 years, but when the going gets tough, some investors will want to talk to someone who can reassure them that they are on the right path.
KCRA: Many Gen-Xers and Baby Boomers have been trained by years of automated phone tree answering services to equate automation with “low value customer;” is there a danger to an asset manager’s brand in using robo-advice services?
Singh: We find that a frictionless, well designed digital experience especially on a tablet such as an iPad actually enhances a brand vs. detracting from it. A well thought-out digital experience will be accretive to asset managers’ brands and is perceived by consumers to be very different from phone trees. We work with clients end to end to think about what their digital experience should be and help engineer it end-to-end so that it fits with their target segmentation and brand value.
KCRA: Some have suggested that Millennials are attracted to robo-advisor services because they may not have to meet the minimum account requirements as compared to a traditional advisor. But one could argue that there are many other opportunities for small investors, so what’s the real appeal of robos?
Singh: Millennials have repeatedly shown great adoption of technology enabled financial services and have trusted these offerings. Great examples include PayPal and Venmo. This is an extension of the trend where they will embrace robo-advice as part of their financial services eco-system. The fact that the minimums are lower makes it an even more attractive proposition.
KCRA: Do you believe there’s a danger that the growth of “institutional grade tax-loss harvesting” strategies using robo-adviser technology could lead to greater regulatory scrutiny of robo-advice?
Singh: As robo-advice becomes more mainstream it is natural there will be more regulatory scrutiny—a critical point is that we expect most assets under the robo-advisor model will be in existing complexes like Schwab or Vanguard. The compliance and regulatory scrutiny these existing complexes have to undergo will not change regardless of the offering and by extension will ultimately apply to the new entrants.
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