Jean Leguy, Research Coordinator at Holland FinTech
Introduced to the market after 2008, the use of robo-advisors to manage assets is being increasingly adopted in the industry. Lower fees, better access to information and often more practical, this new generation of financial counselling presents many advantages to the public, especially younger crowds. We went through the main aspects of this emerging disruption to bring too romantic imaginations down to earth and spark enthusiasm amongst sceptics.
Before 2008, before the fintech era, artificial intelligence and machine learning were not applied in the financial spheres. Barely ten years later, these technologies are the spearhead of financial innovation. Innovators, big or small, are diving hard into it, experimenting around with these new tools to improve the overall efficiency of financial services, while incumbents are scratching their heads to figure out how the impact of innovation will shape their future in the industry. We were at the front row of this fintech imagery during our roundtable on capital markets at IHS Markit.
Given that many people are questioning the soundness of our financial systems, the implementation of neutral and risk-aware machines seems like a reasonable proposition. Another motivation to rely on such technologies is the highly competitive fee, which fluctuates around 0,5% whereas the industry standard for a human advisor is around 1 – 2%, management fees excluded. Naturally the most striking argument would be the computing power intertwined with the growing financial acuity of such machines, enabling performances in some cases high enough to worry traders. An easy and constant access to one’s investment status and a lighter approach to personal finance should finally convince even the most reluctant investors of the potential of robo-advisors.
A still limited technology
Naturally, everything has its limits. Here, the lack of psychological inputs, one might say a fantastic aspect, may disturb the good management of the investors’ asset given the emotional profile of the latter. Another limit is that, if you find yourself with a rather complex financial life, robo-advisors might not be able in the foreseeable future to successfully manage tax issues, highly diverse portfolios, and put together a reflected strategy as any decently competent asset manager could do. In the near future, robo-advisors could be confined to use for lower incomes and relatively simple financial schemes. We saw recently in the news an AI-powered stock picker advising to sell Facebook, not the brightest idea given the rise of the value following the statement. Nonetheless, relying on a neural network and an advanced AI based on the human brain, the robot seems to have enough power potential to become wiser in a near future.
The potential of such technology is still unfathomable. One estimation forecasts an amount of USD 385 billion in assets under robo-advisory management by 2021, which represents significant growth compared to the current USD 100 billion managed by the first five players in the market, while an other one forecasts USD 1 trillion by 2020. Such estimations are rather promising for the coming years, but we can reckon that the market is sill largely untapped, given that Goldman Sachs alone has more than USD 1 trillion of assets under management.
Impact on the industry
As for the impact the technology would have on the traditional industry, we can speculate this growth could put pressure on the industry, which would eventually bend human advisors’ fees downwards. In terms of adoption, younger generations seem to be the first movers, indicating a rise to come.
Another clue highlighting the increasing acceleration of this emerging market, many leading players in the financial industry are rushing into the new tech. We saw recently PayPal linking its service to automatic investment platform Acorns, Wells Fargo launching its own automated investment solution, Intuitive Investment and Morgan Stanley which launched Morgan Stanley Access Investing last week. Some AI-powered tools are also making their appearance on the market, not to replace traders, but to support them and provide them with better decision-making skills. ING recently released such an automated program, the Katana module.
The above graph shows well enough the growing path that automated investments are taking, expected to be quite exponential. According to VentureBeat, three trends are facilitating this development. The availability of data creates a perfect pool for AI to improve its preciseness, enabled as well by the enhancement of storage and computing power. The third element is naturally the huge advances in artificial intelligence, which could ultimately create a Moore’s Law pattern in the field.
Advantages promised by robo-advisors could smooth the regulatory concerns surrounding the technology. As the service provided to investors is transparent and easily measurable, regulation regarding the quality of the service should not pose too much of a problem. The same goes for the risk profile of those advisors, which, irrespective of any psychological feature, should stay constant and adjustable. Moreover, the technology is rather well encompassed by the upcoming implementation of MiFIDII, and the ESMA already spoke its views on how to make robo-advisors compliant to the new regulatory suite.***
Automated investing opportunities are without a doubt a major game-changing technology. At the moment, a mix of robo-advisor and human advisor seems like the best compromise to achieve a fruitful portfolio, as the technology lacks (and probably will for a while) the full expertise a traditional expert could provide.]]>