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ROBO-ADVISERS Robo-advisers: adapting to disruption
Robo-advisers are here to stay. Banks should embrace disruptive technologies, in order to enhance their customer reach with a focus on Millennials and the mass affluent
Author V. Ramkumar, Senior Partner, Cedar Management Consulting International
will be around $100 trillion by 2020. Interestingly, about 5% of that is estimated to come from robo-advisory services. In addition, Millennial assets are presently at $2 trillion and this segment is likely to inherit at least $30 trillion from parents and grandparents in the next 10 years.
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With self-learning algorithms that can help determine the client’s risk appetite, financial context and investment preferences, robo advisers are the new kids on the do-it-yourself street. It is no surprise, then, to see robo- advisers becoming an increasingly popular avenue with self-help Millennials, and also with the ‘mass affluent’ segment, for whom advice is now affordable.
So, what does this disruption mean for the wealth management industry? Drawing on the Balanced Scorecard Framework, the implications are viewed from four different perspectives:
lobal Assets Under Management (AUM)
1. What financial impact does the robo-adviser have on the transaction model?
While more than 40% of the world’s wealth has been with the Ultra HNI and the HNI segment, they constitute less than 1% of the world population. The robo-advice movement is tapping into the mass affluent and emerging segments, that constitutes over 30% of the global population, by making investment advice affordable.
Even while the established industry norm is 1% fees of the AUM, robo-advisors deliver this at 30% of that fee structure, with increasing transparency and a simplified customer experience. More importantly, the ticket size of investments has moved down significantly – the average size of a robo-adviser account is between $20,000 and $50,000. A far cry from historical large ticket HNI segments.
2. How should the offering for the emerging new age customer segment be structured?
The key here is in the positioning – as a pureplay wealth management firm, a stand-alone robo-advisory offering, or a hybrid of the two. Interesting examples are Vanguard and Charles Shwab, who have built their own in-house robo-advisory capabilities to deliver a holistic offering. Vanguard reportedly built a $12 billion portfolio within six months of its launch, demonstrating the strength of this combined positioning. The other key
www.ibsintelligence.com © IBS Intelligence 2017
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