What is the main value added of this new financial technology “robo-advice” for potential clients?
Without a doubt, we can say that it is the low cost. The traditional advisors charge at least 1 percent per annum, and there are usually minimum account requirements; for example, they will not advise you for less than 10 thousand or 50 thousand. But the robo-advisors charge on average 0.4 percent in the US and 0.8 percent in the EU, which makes them much cheaper. Further, there is no account requirement for opening a robo-advisory account.
They are also very user-friendly; you can open a robo-advisory account with a cellphone application or online in 15 minutes. The only thing you have to do is to fill in an online questionnaire about your investment preferences, and you can change your contributions and update your preferences without meeting or calling an advisor.
The third point is the passive investment strategies, which is what robo-advisors offer. They have proved to be quite successful at automation in general and they reduce the conflicts of interest,
making them a good fit for long-term retail investors.
Who are the potential clients of robo-advisors?
The target group was obviously the millennials in the beginning, but now it is oriented more toward wealthy, educated, and older individuals. For example, in Germany a typical potential client has net household income of €4,000, is on average 40 years old, and is a university graduate.
Thus, the potential clients are now richer, more educated, and older.
Where do we see the largest robo-advice market at the moment?
The largest market is in the US. The robo-advisor start-ups’ assets under management grew eightfold from 2013 to 2017—so, in four years they grew eight times the original value.
In Europe, the market is 5 or 6 percent of the market in the US; so it is much smaller and is concentrated in the UK and Germany.
In the US, the investors are using robo-advisors for retirement savings, while in the EU, the market is small because we have a different pension system.
But if the institutional investors in Europe (for example pension funds or insurance corporations) were to invest in robo-advice or use these services, there would be a huge potential.
Looking forward, in terms of robo-advice, what should we expect?
Very large players are now entering the robo-advice market; very large asset management firms and banks are now offering these services.
Therefore, it is not a market only for start-ups.
This means that the start-up companies will find it difficult to offer business-to-customer services, due to which they will probably change to business-to-business. This means that the robo-advisor start-ups will offer partnerships to large asset management firms and banks and that there will probably be some takeovers in the future.
What should policy-makers or politicians expect from robo-advisory?
I think it is also very important for them because with robo-advice, less wealthy and financially less knowledgeable investors will enroll in capital markets and will benefit from cheap financial advice; otherwise, they tend to make mistakes and stay away from capital markets.
I think it is very important from a societal perspective that less wealthy people or people who have little knowledge about financial markets can participate in financial markets through robo-advisory.
To conclude, I think we can say that the market is going to grow for robo-advice and that it has huge potential to complement rather than displace traditional financial advisory.
Have you read?
-> Robo-advice – a true innovation in asset management by Dr. Orcun Kaya; editing by Jan Schildbach for Deutsche Bank Research.