Capitalizing on a growing opportunity
The wealth management industry is likely entering a period of significant disruption, with robo-advice at the heart of this disruption. Digital, automated advice will likely become a standard expectation for the mass-affluent and mass-market segments. But big data and advanced analytics have the potential to dramatically expand the scope of roboadvice, incorporating financial planning into broader retirement, health, and wellbeing, and enabling quasi institutional research, which could then impact all investor segments. All wealth management firms should take notice.
What is robo-advice?
Over the past few years, a new form of advice has emerged with a new breed of wealth management firm starting to gather retail assets away from incumbent players. These firms leverage client information and algorithms to develop automated portfolio allocation and investment recommendations tailored to the individual clients. They have been coined the term “robo-advisors,” and include firms that offer their clients access to robo-advice through rich, digital user interfaces for very low fees (and sometimes free).
Together the leading eleven robo-advisor firms have seen explosive growth since market entry. At the end of 2014 these firms grew to ~$19 Billion AUM, a near 65 percent growth from the previous year. However, these new market entrants are still nascent and represent a trivial amount relative to the $25+ trillion retail investable assets in the United States. Their lack of distribution has likely contributed to difficulties in reaching a large number of potential customers. But this may be about to change with large wealth management firms now joining the fray, including Charles Schwab and Vanguard, bringing both investment dollars and distribution to the robo-advice space.
This is only the tip of the iceberg…