30 Oct Are robo-advisors the real deal?

We love disruption because we love technology and these days it’s impossible to find one without the other. Which is why, virtually unthinkable a few years ago, the surprising rise of robo-advisors in the financial services industry has us fascinated. Robo-advisors are disrupting the financial services space. What are they? Where in the hype cycle are they and what do they mean in the big picture?

Robo-advisors are not shiny metallic androids sitting behind desks although admittedly that was the first image that came to our minds. They are automated investment advice platforms. Typical investment advice from human counterparts costs you 1-2% of your portfolio per year. Robo-advisors cost a quarter to a third of that. They also exploit a sizable gap in the investment industry. If you did not have a minimum portfolio of investments say USD 500K or so you could not really get the advice from the better firms. Your only option was to listen to advice experts on the Internet and do it yourself.

Robo-advisors changed all that. They did not have minimum requirements. You told them your risk profile based on questions you answered, and they used proven investment theories and models to give you advice. Suddenly anyone could get sound investment advice.

We feel that robo-advisors are not important for what they are right now but what they can become. Total assets under robo-advisors are in billions of dollars while assets under management of good old fashioned human advisors are in trillions of dollars. In the short term we do expect them to keep getting traction because their greatest applicability is to the individual investor who does not have the skills to invest themselves and does not meet the minimum portfolio amount needed to get a human advisor. This is not an insignificant market. We also expect this trend to weed out poor human advisors as their returns, which could be ignored earlier by managers, will now be under scrutiny as automated programs beat them.

Innovations in any field cannot be predicted. Many technology pundits and investment field experts are hypothesizing minimum impact for robo-advisors because their current performance is adequate and not stunning. But as the 200 or so robo-advisor companies get shaken out by acquisitions, mergers and liquidation we fully expert a few leaders to emerge who are investing in the fundamental analytics foundations of the field. Advancements in deep neural networks, deep learning and machine learning are affecting the future of everything. We fully expect them to result in breakthroughs that will lead to greater disruption. Robo-advisors are the tip of the spear.

Banks will treat robo-advisors as just another ADC (Alternate Distribution Channels) component. And the cool “must have” factor cannot be under estimated here. But we can’t help but think that financial institutions that partner with large deep learning players to upgrade the performance bar in this technology stand the chance to reap billions in value.