Robo advisors: The technology arms race taking the investment world by storm
Automated investment advice platforms or “Robo Advisors” as they are more commonly referred to in the industry, have the potential to revolutionize one of Wall Street’s prized assets – the traditional asset management industry. Robo advisors are already being tipped by many to inflict the same level of disruption in the wealth advisory industry as AirBnb and Uber have inflicted on the hotel and taxi industries respectively.
The core premise behind Robo Advisors is the use of automated algorithm-based portfolio management software that builds well balanced and diversified portfolios with minimal human intervention for a fraction of the cost charged by traditional private banks or wealth management firms. Robo advisory fees range between 0.5% – 1% versus the 3-5% often charged by private banks for a similar service. The difference in fees means investors keep more of their hard earned money in their portfolio – a welcome change given just how volatile markets have been over the past two years.
This low cost approach to investing is already well established with US and UK based investors, a trend that consultancy group A.T Kearney expects to continue in the years ahead. Total assets under Robo management are forecast to hit over two trillion dollars by the end of this decade. This figure could climb even higher should the service begin to flourish with Asian investors – a relatively untapped market by the major Robo Advisor players.
Two singaporean based companies already have their eye on the space, with high hopes that their services will be available to local investors by the first half of the year. Infinity Partners, a pioneer in the Asian Robo advisory space, has plans to launch a platform for American expatriates – a niche market worth an estimated $1bn dollars. The firm hopes to extend the service further in 2016 by rolling out the product to local accredited investors.
Infinity Partners are not alone, Singaporean based startup Smartly are also keen to get in on the act when their own platform launches in July this year. Smartly hopes its platform will prove popular with Southeast Asia’s millennial market – a demographic that robo advisors in the US and UK have had tremendous success with.
Kicking the tires: How do robo advisors work?
Providing professional and actionable investment advice at a low cost is the central aim for robo advisory services, and most platforms rely on established risk and portfolio management techniques to ensure they are providing an efficient service to their investors. The first step new customers will undertake is a comprehensive risk assessment questionnaire that aims to establish their risk profile – these profiles generally fall into the standard spectrum of conservative, balanced, or aggressive depending on the investor’s individual aims and personal circumstance.
The initial risk assessment will also establish the investor’s existing financial position and establish any future financial goals through the use of various retirement and savings calculators built into the service. A model portfolio is constructed based on the investor’s risk profile by allocating funds to an appropriate mix of equity, fixed income, and commodity linked ETFs.
A Passive Strategy with Low Costs
ETFs are passive investment vehicles that aim to mirror the performance of an underlying asset or index such as gold or the S&P500, ensuring investors are spared issues relating to market timing, or selection risk by individual portfolio managers. They are an immensely popular investment vehicle that share many features of the robo advisor platforms, since they offer exposure to a variety of underlying markets in a cost efficient and liquid package. While this style of investing comes with its own particular set of risks, most investors stand to benefit from the “best practice” portfolio construction techniques that Robo advisors employ with many also benefiting from auto rebalancing.
In short, the automated nature of these platforms will appeal to a broad segment of investors looking to start a new portfolio or optimize the efficiency of their existing portfolio in a cost efficient way. Although the industry is still in its infancy, the services on offer are a potential game changer for investors looking to leverage decades’ worth of professional wealth management experience at a fraction of the cost – a service certainly worth keeping an eye on.