Chat-based Robo-Advisors – A Game changer in the banking space

As Barclays becomes the latest bank to debut a Robo-advisor product, we examine how AI-powered advising platforms are altering the world of wealth management and ask, "Can Robo-advisors replace human representatives?"

Robo-advisors aren't new; they initially surfaced due to the 2008 financial crisis more than a decade ago. However, their market is continuously expanding, which creates a big potential for financial services organisations and fintech startups to attract clients who lack the time or competence to invest on their own.

Assets managed by Robo-advisors are expected to increase from $987,494 million in 2020 to $2,487,280 million by 2024. Simultaneously, the number of users is predicted to double, rising from 224.6 million in 2020 to 436.4 million in 2024.

There is also overwhelming evidence of a demand for easily available financial counsel. According to a recent YouGov study in the UK, 56% of consumers believe they do not already have access to the expert help they would need to begin investing.

So, what you should know about Robo-advisors in the financial services market's wealth management segment?

Let's look at what Robo-advisors are, how they function, their benefits and limits, how to get started, and if they will replace people.

What exactly are Robo-advisors?

Robo-advisors are digital wealth management systems that employ algorithms to deliver automated financial planning services with minimal human oversight. Platforms have grown over the previous decade to provide increasingly complicated services like investment selection, tax-loss harvesting, and retirement planning.

First, most platforms ask users to complete a questionnaire that assesses their current financial condition, risk tolerance, and future ambitions. The system may then construct a customised strategy, give advice, and make investment decisions to maximise the customer's portfolio.

Previously, only clients with at least $100,000 in investable assets could get specialised investing services from a human adviser. Still, Robo-advisors have expanded the industry by demanding very modest initial balances and charging very low fees.

So, will Robo-advisers render human advisors outdated?

In a word, it's quite improbable shortly. The function of Robo-advisers is more to give services to a previously underserved part of the market and to supplement the work of human advisors.

A significant advantage of Robo-advisors is that organisations can now provide professional investment management services to investors for a part of the cost that they could previously.

Previously, investors would have paid an adviser at least 1% of their total assets under management to handle their portfolio. Still, today a Robo-advisor may do the same for free or as low as 0.25% each year.

Investment possibilities are now available to many clients because of the cheap costs and the opportunity to start with a small beginning balance. As a result, businesses may provide far more appealing choices to gain their business.

Companies can also employ Robo-advisers to help their human advisors work more efficiently. For example, using artificial intelligence to automate typical administrative or monitoring duties can relieve advisers of their load and free up their time to focus on higher-value work.

Another advantage is that machine learning to evaluate massive amounts of financial data might reveal possibilities that human advisers may have overlooked, especially in rapidly changing market circumstances. As a result, hybrid-Robo-advice, in which investment managers utilise artificial intelligence to improve the total quality and opportunity of their asset allocation and portfolio rebalancing services, is becoming a popular approach.

Similarly, Robo-advisors are not subject to prejudice or emotion in decision-making and thus are less likely to make mistakes than a human advisor.

What are their boundaries?

While Robo-advisors have been a godsend to the financial services sector, they are not without flaws.

One prevalent critique is that they do not provide a one-size-fits-all approach to wealth management and lack the personal touch that certain areas of financial planning requirements.

According to research conducted by Investopedia and the Financial Planning Association, 40% of customers would not feel comfortable utilising an automated investment platform during periods of significant market volatility. This is when human consultants play a role that a machine cannot mimic.

On the other hand, human advisers may converse with clients to elicit the necessary information and assist them in making the best selections.

How do Robo-advisors operate?

Machine learning algorithms are used by Robo-advisers to automatically allocate, maintain, and optimise their customers' investment portfolios. Most platforms employ Modern Portfolio Theory (MPT) to design an optimum, balanced portfolio based on variables such as consumers' financial goals, risk tolerance, and period. Once the money is invested, the Robo-advisor automatically maintains consumers' portfolios. They can reinvest dividends to prevent cash drag, and when it comes time to sell investments, they may structure transactions to be as tax-efficient as possible.

Custom solution creation vs ready solutions

Suppose you want to add a Robo-advisor service to your company. In that case, you have three options: design a solution from scratch, acquire white-labelled Robo-advisory software or collaborate with a fintech firm.

Custom development gives you control over the end product and helps you build a single, seamless consumer experience, but it is the most expensive choice. Furthermore, unless you have the requisite knowledge and skills in-house, it would be prudent to explore collaborating with a bespoke development business.

Collaboration with a fintech startup, on the other hand, maybe a superior solution for some firms. Startups frequently have the technology and capacity to compete but lack the brand awareness and trust required to get a footing in the market. Agreeing on a mutually beneficial relationship can help you enter the market more quickly and reduce costs.

White-label services/solutions

As the industry expands, numerous businesses are offering white-labelled Robo-advisor products. Consider the following:

Pro Jemstep Advisor

Jemstep Advisor Pro is a bank-grade digital wealth platform that spans the whole advice lifecycle and is one of the first-ever firms in the market to capitalise on the white-label trend.

The platform, ideal for banks, broker-dealers, credit unions, registered investment advisers, and insurers, can be tailored to fit a firm's service model, giving complete control over the customer experience. It may also be connected with a firm's existing technological infrastructure, saving advisers time learning a new system.

Empirica RoboAdvisor

Empirica, an intelligent Robo-advisory platform for wealth and asset managers, claims to have the market's most powerful algorithmic engine.

The technology makes it simple for wealth management firms to automate their operations. It may be used to automate customer onboarding, portfolio construction and rebalancing, asset allocation, and dividend reinvestment. Firms may leverage the platform's information to boost customer engagement and decrease turnover.

AdvisorEngine

AdvisorEngine is a sophisticated platform with CRM features, enabling businesses to use their existing technology modules to employ the whole platform or design a tech stack.

Financial advisers may add capabilities ranging from digital onboarding and goal-based planning to trading and rebalancing, as well as a bespoke or pre-built investment framework. In addition, the platform integrates with various providers, such as Salesforce, Office 365, and Quovo.

According to Dirk Klee, CEO of Wealth Management and Investments at Barclays, the number of individuals wishing to invest for the first time has increased after COVID-19. "It seems more vital than ever that we provide individuals the necessary tools and guidance to prepare for their financial future," he said during the introduction of Barclays Plan & Invest, the bank's new digital service.

Banks and financial service providers that have yet to provide a Robo-advisor service risk losing consumers to competitors who do, as well as substantial new market shares and income.

However, while the AI employed in Robo-advisors is developing daily, success for businesses will require the correct combination of digital skills and conventional client engagement. While artificial intelligence alters wealth management and increases efficiency, the technology cannot duplicate the whole human experience.