Financial Services Industry Steps Into The Future With Robo-Advisory

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ETFC: E*TRADE Financial logo
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E*TRADE Financial

Robo-advisory is the use of automation and digital techniques to manage exchange traded funds (ETFs) and other instruments. Many brokerages have begun offering robo-advisory services to complement, and increasingly replace, the existing array of traditional advisory services. A CFA Institute survey revealed that 88% of investment professionals worldwide believe that robo-advisors will soon replace human advisors that target the mass affluent. Accordingly, many established firms are expected to create their own digital platforms or partner with startups as the industry matures.

The latest brokerage to join the bandwagon is E-Trade, with the launch of its “Adaptive Portfolio” tool. This development follows the introduction of Schwab’s “Intelligent Portfolios” in 2015. Below we discuss the pros and cons of robo-advisory, as well as the outlook for the space.

The Good

  • Lower costs
  • Increased transparency
  • Lower turnover, owing to less human interference
  • Increased accuracy and speed
  • Opportunity for smaller investors
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The Bad

  • Susceptible to mechanical failures
  • Flaws in advice algorithms
  • Mis-selling of financial advice leading to increased monitoring
  • Under-diversification

The Growth Trajectory

According to a study by A.T. Kearney, the adoption rate of robo-advisory services will likely increase multi-fold in the next five years, helped by the ease and lower cost of using the automatic route, as opposed to the traditional way of investing.

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Another study, conducted by BI Intelligence, forecast that the global assets managed by robo-advisors will exceed $8 trillion by 2020, approximately 25% of which are expected to be in the U.S.

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The Players

A number of private and public players have ventured into robo-advisory in recent years. The smaller players in the market, such as Betterment, Wealthfront and Personal Capital, have taken a big chunk of the industry. In a bid to compete against the increasing pressure from these companies, established firms like Fidelity and Wells Fargo are increasingly investing in new technology and looking at introducing robo-investing products. Goldman Sachs recently made a move to buy Honest Dollar, a startup which aims to make it quicker and simpler to set up savings accounts for retirement. Meanwhile, BlackRock bought Future Advisor and Northwestern Mutual Life Insurance acquired online money manager LearnVest. All of this suggests that robo-advisory services will become a mainstream feature in the coming years.

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