Digital and Robo in Wealth Management: What’s the Difference?


By Vasyl Soloshchuk, CEO and Co-Owner at INSART

During our ongoing discussions with top-notch industry leaders who are reshaping the wealth management landscape, we often touch on digital advice. Here, we present some of our picks in terms of robo components in WealthTech solutions, and how much these differ from the notion of digital advice. Before we jump in, here are some statistics to give you a clear picture on where the wealth management segment, based on artificial intelligence (AI) and other emerging technologies, is heading.

According to Statista, the global market share of assets under management in the robo-advisory sector will reach $371,429m in 2018, with a gradual annual rise of 37.9%, reaching $1,353,268m over a five-year span. The US will be at the top of Olympus in terms of AUM, accounting for more than 70% of total automated online portfolio management: the numbers will grow from $266,190m in 2018 comparing to 2017’s $182,505m (a more than 45% annual increase) in smart advisory models driven by algorithms.

Beyond that, Accenture suggests that, nowadays, robo-advisory capabilities are still works in progress, with some of the basic processes being outsourced to machines. Traditional questionnaires are still being used to assess the long-term goals of prospects and tailor portfolios according to those preferences.

Robo-advisory as a part of complex wealth management offerings

To begin with, it’s worth mentioning the opinions of DriveWealth’s C-suite executives, who took the company on a mission to transform the affordability and accessibility of solutions for the retail segment. DriveWealth aims to offer robo-advisory as a part of sophisticated wealth management product suite at a cost most people can afford.

For instance, Harry Temkin, Chief Financial Officer and Chief Operations Officer at DriveWealth, explained that one of the three primary types of customers the company serves is investment advisory firms who want to offer a digital-type product, particularly a robo-advisory product. The executive noted that for him “robo” is equal to an automated process in which a client loads an application and answers a series of questions. These questions could cover basics such as age, investment horizon, retirement age, etc. To top it off, the survey might include questions about investment style and philosophy with regard to accumulating wealth. After the initial insights have been collected, an algorithm automatically suggests the best-fit portfolio based on the information gathered. Harry noted that in the case of robo advice the process is fully automated, and there is no human intervention by a consultant.

“They have simply built an algorithm where, based on how the customer answers a series of questions, they’re given a portfolio. That portfolio then has a drift factor associated with it and a time-based rebalance logic,” Harry Temkin

Harry highlighted that rebalancing can be done every week or month, on a quarterly basis, or twice per year. The portfolio automatically rebalances and the application keeps the customer up to date on how the portfolio’s performance, as well as providing a mechanism to add more money to it and to cash funds in.

Even within “digital wealth management” or “digital advice,” to Harry there’s still interaction between the advisor and their customer. The advisor might recommend a portfolio to the customer, but they’re providing everything on a mobile device instead of via a traditional sit-down in the office. A meeting with a prospect can shift from “let’s have a conversation or send an email” to a process through the device. That dialogue comprises a series of questions, but there remains an actual relationship between the human financial advisor and the customer. The myriad options allow customers to change the weights that the advisor is recommending to them. However, the client is still the one to decide whether to purchase or modify the portfolio. DriveWealth accounts for situations wherein clients want to make decisions solo, or with the help of a consultant:

“Our platform, along with our mobile applications, support either one of those environments. We actually call it full discretionary accounts where a broker can buy and sell securities without the client’s consent and we have another account type called semi-managed, which is one in which the advisor recommends a portfolio to the customer but it’s still an account in which they’re controlling the trading decision,” Harry Temkin

The top management of DriveWealth emphasized that a true robo solution is one in which customers have access to a fully automated environment in which they’ve been given a portfolio and all they have to do its monitor and control it, with technology supporting institutional customers. The company offers accounts where the managed system actually aggregates all the positions and cash into a so-called “master average price account,” and allows the institution to trade in large blocks and then simply allocate the shares down to the customer at one average price.

There is no doubt that stiff competition and emerging technologies will significantly increase the adoption of robo components in wealth management products, but the personal touch will remain pivotal for customer service.

How does Europe feel about robo in WealthTech?

Martin Polasek from Swiss company Evolute is sure that in Switzerland robo advisors are not gaining significant ground in the market. The main reason why they can’t keep up with client expectations pertains to the level of personalization:

“On one side, the robo-advisors can deal with the high level of standardization and simplification. Thus, they allow the company to accelerate in terms of the pricing point and create very attractive portfolio solutions to clients. On the other hand, they don’t delight the customer.”

The CTO of Evolute revealed doubts that robo solutions will substitute advisors in terms of the highly customized experience human touch offers, as well as replicating the ability of an advisor to handle the client’s emotions and design bespoke solutions.

Three ways to embrace the robo component, from Folio Investing

But that’s not all. While Folio Investing claims that the company is not a robo advisor per se, the WealthTech player collaborates with many robo advisors in the marketplace and provides technology and a platform for these robo advisors. The company serves the needs of its clients in several distinct ways:

  • First, via a very simplified streamlined approach through which it automates the key components of a workflow and allows 80 registered investment advisors to eventually bring the efficiencies of a robo platform to their business.
  • Second, by providing an opportunity to embrace a full suite of capabilities through a set of APIs, which enables robo advisors to create their own front end and their own client ecosystem and engagement environment. Thus, the client uses the full potential of APIs to actualize everything, including the patented Folio investing process, which utilizes dollar-based fractional-share investing that guarantees a precise and efficient investment outcome.
  • Finally, later this year the company will launch a solution in collaboration with a very large enterprise client. Folio Investment management revealed that this offering will bring the robo experience to a whole new level with its modular-based, completely customizable and white-label platform:

“It will allow for a much deeper and much broader range of investment profiling and investor questionnaire to truly allow in a robo environment somebody to not only define and understand their investment profile, but to also be able to invest in accordance with their values, their beliefs, and truly refine the process to a level that, so far, hasn’t happened,” Greg Vigrass, President of Folio Institutional

The CEO of Folio Investing stated that this robo solution will actually allow for the creation of a bespoke portfolio, on the fly and completely tailored to the individual’s needs.

Robos in the background of AI-driven asset management

Sid Sharma, a tech guru at Hedgeable, harnesses the power of AI that the company brings on board to put the robo aspect on the back in order to build the best product for the consumer.

“The real purpose of AI is not to put a robot in front of somebody’s face,” Sid Sharma

Sid was certain that robo solutions won’t replace humans, since the latter do certain jobs much better than machines. However, there will be more specialized jobs, since building long-lasting ties with customers and remaining ahead of the curve entails a need for companies to pick up their game. While advisors can certainly perform the same tasks as computers, consultants will be more involved in personal aspects, and work on building the client’s trust.

Bryan Sachdeva, a CTO of Canadian NexJ Systems, highlighted a clear distinction between digital and robo wealth management solutions. Bryan acknowledged that, from his perspective, robo advisors have been a great disrupter in the industry, in particular commoditizing the financial advice practice down to the mass market. It’s now very easy for people with digital expectations, who are familiar with using self-serve apps, to go online, answer a few questions, and get an asset-allocation strategy that is managed for them. Bryan felt that this represents the first iteration of robo advice, but highlighted that one thing the approach lacks is an understanding of the client’s chosen strategy, and how this relates to his or her financial plan.

“It’s great for the hands-off consumer, but then when we get into the digital advice that’s really interesting, because that’s the hybrid approach,” Bryan Sachdeva

The main question for WealthTech companies is how to augment digitization and introduce traditional human advisors in a more digital fashion:

“Sure, as a customer I can go and I can see my asset allocation, I can see how it’s being rebalanced, I can see all the information, but I want to get advice from a professional, not have something automate the whole process for me, I do want that advice,” Bryan Sachdeva

Bryan was confident that the trend of consumers seeking personalized advice is still there, as, on a global scale, we’re not yet at the level where AI can really provide the required level of a custom-tailored portfolio to meet client needs. Another question to think about is how we can bring personalized advice to the digital channels and enable the advisor to be more present across all of the different channels:

“I think that’s the fundamental difference for me with digital and hybrid advice, and I think that really is the direction that we’re going to see the industry go, especially in the mass-affluence and HNWI segments,” Bryan Sachdeva

The idea that customers may start off with robo, eventually grow their assets, and then want more sophisticated and personalized advice through a digital option is important to foresee and account for.

Takeaways

While robo-advice offerings are unlikely to overtake traditional asset-management practices, the automated component in wealth management products will augment the role of the human consultant, adding more edge to existing solutions. This is particularly true when it comes to high-net-worth and ultra-rich investors who will not blindly trust machines to manage their wealth. The best idea for wealth management companies will be to leverage the emerging technology to complement capital market expertise so as to better serve their clients with fewer dollars spent on mundane tasks and day-to-day operations.

Digital-advice is more about a hybrid solution where a human touch is still required. It is about the automation of all routine business flows and integration with as many players in the ecosystem as possible. Robo advice entails relying on AI for decision making, and there is no doubt that it represents the next step in investment management.


Vasyl Soloshchuk, CEO and co-owner at INSART, FinTech & Java engineering company. Vasyl is also author of the WealthTech Club blog, which conducts research into Fortune and Startup Robo-advisor and Wealth Management companies in terms of the technology ecosystem.