Robo-advisor of the Future

Vasyl Soloshchuk

Roboadvisor of the Future

Today, robo-advisors are rapidly increasing in popularity. They provide financial planning at low cost with a variety of programs and features. But what will they look like tomorrow? In today’s post, I want to discuss how robo-advising may change in the next five to 10 years.

From first steps to today

To understand possible changes in this kind of software, we need to remember what caused its appearance and why it became so popular. Though the type of software that is now called “robo-advisors” was widely discussed and advertised about 10 years ago, it was first created years before the 2008 crisis. However, at that point it was only used by financial advisors to automate certain calculations. Betterment and Wealthfront were among the first companies to enable members of the public to conduct investments themselves; thus, wealth management started to become democratized.

Nowadays, there is a wide range of robo-advisory platforms and people have a number of available investment choices, minimum investment amounts, standard or individual investment plans, etc. Moreover, even applications that used to be separate from wealth management are now expanding their functionality and enabling users to transfer money online.

Simon Bussy, Principal Consultant at Altus Ltd, believes that the boundaries of WealthTech solutions are only people’s imagination: “I would offer WeChat in China as an example. What started off as a little app used on mobile phones to send messages or pictures is now a platform in its own right where users can transfer money to friends and charities; they can online shop; they can even buy and configure a car. And so much more. They offer digital payment facilities, an online banking service, and, importantly, users can even invest. An increasingly smart-connected ecosystem, in China users can literally run their whole life through that one single app.

The same example is used by April Rudin, a global wealth marketing strategist. She says, “One of the most interesting things I just looked at a few years ago was that WeChat has announced that it is launching wealth-management services. They have a huge installed base and it’s a brand that is trusted by millennials and by people who are digitally connected. So they believe that if you can have secure messaging, you can have investment management. One of the things about wealth management that WM firms need to know is that the competition can come from unexpected places.

What should we expect?

As technology develops, wealth-management solutions will play an increasingly prominent role in our lives. Talking about the robo-advisor of the future, April Rudin believes that “investment management becomes embedded in your everyday life, and it doesn’t become this once-a-month or once-a-year task where people go to their financial advisor for some kind of dressing down or analysis or reporting. It’s more real time and it’s more integrated. That’s my version of a robo-advisor 10.0; it’s not a robo-advisor at all. All of my financial life is really embedded in my real life.

While applications outside wealth management include financial services, robo-advisors will also evolve and become even more client-oriented. Some of them already offer human advice in addition to digital planning, and more WealthTech platforms will shift to a human-and-digital model. Thus, a number of financial advisors may gradually get out of the industry. Alex Chalekian, CEO at Lake Avenue Financial, considers that “in the next five to 10 years, you might see half as many advisors out there. I would compare this to the travel agency industry. When’s the last time you talked to a travel agent? You probably go online and book your hotel and your flights that way, and you’re comfortable doing that. There are still some travel agents out there who had sufficient scale and size to be able to outlast the storm, but you don’t see a lot of them out there.

More technological trends will be successfully used in WealthTech. If Big Data analytics is used more widely, robo-advisors will be able to examine investors more thoroughly and identify people’s circumstances that do not come up through the risk-tolerance questionnaire. Thus, the lack of certain human interactions, such as body language, may be compensated by using data from social media or open APIs. Analyzing customer data will give wealth-management platforms means to provide tailored solutions on an individual basis that will meet customers’ needs and warn them against the risks of careless investing.

Big Data

Lex Sokolin, Global Director of Fintech Strategy at Autonomous Research, provides the following example of such analysis: “Let’s say I claim that I’m an extremely high-risk taker and not only do I want to be in equities, but I want to be 50% in cryptocurrencies. I want to just speculate all my money. Let’s say that I have a kid. So my Google Graph says, ‘You have a two-month-old kid. Do you really think that you should put everything into bitcoin?’ That’s a useful interaction of Big Data, of understanding who I am, of helping me fulfill my financial journey, and I think that’s really useful and that’s where I would like to have the digital wealth industry go.

Open APIs, another trend in FinTech, will definitely provide a whole host of opportunities and innovation going forward; companies will use customer data as a strategic asset. Simon Bussy talks about Starling as an example of prospects for this approach: “Their technology stack is all self-build, open APIs; a number of third-party partners can integrate their propositions and, with customers’ permission, share data. In time, what we’ll have is a segment of consumers who are far happier to share data as long as they can see value coming back the other way, and in Starling’s case that will be, all being well, a best-in-class proposition—their own current account plus a whole range of best-in-class third-party solutions, for example we could see partners offering mortgages and loans, FX, digital advice, utility services, GI, robo-investments, and so on.

Another technology trend that is gaining momentum today is blockchain; but realizing the potentials of this doesn’t seem likely in the near future. Applying blockchain in WealthTech software might also provide plenty advantages, the main one being that nobody needs to verify any data because blockchain is secure by design and inherently resistant to modification of data. When a transaction happens, everybody knows that it’s a true transaction. From the other side, blockchain may be useful only if every money movement, all trading of equities and bonds from start to finish, every single thing to do with the client portfolio (e.g., asset allocation, ETF rebalancing) happens on a shared ledger.

Talking about blockchain, Lex Sokolin considers that “what’s happening now is that in the institutional world, blockchain is 100% being piloted and put into production around bonds, insurance, derivatives and large B2B payments. That is step one, and that has to happen way before it trickles down to wealth management because wealth management is a consumer of infrastructure rather than a builder of infrastructure.

What should be done

Much work remains to be done to make robo-advising more efficient. First, companies providing robo-advisor services should establish better communication with their clients. Thus, they may kill two birds with one stone: improving investing culture while keeping their clients engaged with the process and results.

According to Dan Sondhelm, CEO of Sondhelm Partners, communication strategy is the most overlooked area for improving robo-advisors. “You’ve got to communicate with your customers. You can’t just have somebody stumble on your website, put in $5,000, and never talk to them again. You’ve just got to bring in that communication expertise to help them engage. It’s about engaging with that client on a regular basis with really strong content. That’s the area where firms fail.

One more thing that can be done is to use technology from an analytical standpoint. WealthTech companies need to unite Big Data, artificial intelligence, biometrics, and open APIs, and probably make algorithms more sophisticated so that they can deal with more complex situations and offer more intelligent and reasonable advice.

Because people are increasingly using their smart devices, robo-advising should become part of their smart-connected ecosystem—it should be embedded in their everyday lives. More people will then feel comfortable investing, because wealth-management software looks like everything else, like the rest of the software they use, rather than as a task they perform from a sense of duty. This will make people invest for pleasure and even fun.