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The Robo-Advisor Threat

Friday, January 17th, 2014

The relationship between clients and their financial advisors has undergone a fundamental change within the past few years. While in the past wealthy clients relied heavily on the recommendations of their financial advisors and private bankers, the situation nowadays looks fundamentally different. On the one hand there is the older, yet shrinking client segment that mainly still depends on what their financial advisor proposes while on the other hand a new generation arises, namely that of the young and tech-savvy.

Though (on average) not yet earning the really big money, the urge of moving independently and self-confidently on today’s markets encourages them to deal with do-it-yourself-investments. As this generation has grown up with the Internet and all its possibilities, they know where to find the information and support they need. Most recent developments offer them tools known as robo-advisors that promise to replace face-to-face meetings with costly advisors. These tools help them to build up and manage their portfolio, give recommendations about which assets to sell, buy or to hold, and support personal financial planning. Robo-advisors range from pure technology websites to established financial service companies which are enriching their services by offering online advisory. Probably the best known example in this new, fast-growing space is a start-up company called WealthFront, based in Silicon Valley, which has just surpassed USD 500m assets under management. This trend is also partly triggered by the rise of low-cost, indexed ETFs, on which this younger generation mainly focuses rather than on active investments.

In essence, robo-advisors claim to offer not only substantially lower fees but also (in the long run) higher performance as investment decisions are taken by sophisticated, self-learning algorithms rather than error-prone human beings or investment committees.

So far, robo-advisors have only a miniscule market share in the overall wealth management market. However, we believe that over the long run such platforms could play a much bigger role, threatening established wealth management firms and eroding fee levels. Every wealth advisor firm should very closely watch these new competitors and think about defensive measures.

In the longer-term, it may be even a matter of life and death for established private banks and wealth managers to think about integrating the robo-advisor business model in their own offer for wealthy clients. The personal relationship with clients and their trust is today’s biggest asset of wealth management firms around the globe. But isn’t it true that these relationships and the hard-earned trust have recently been under attack – especially since the financial crisis started five years ago? It is not too farfetched to assume that this erosion will accelerate over the coming years and robo-advisors will play the role of catalyst in this process.

Wealth managers and private banks need to re-invent themselves and think hard about how to integrate elements and ideas of the robo-advisory-model in their own business model. How exactly this might look is the billion dollar question.

 
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