How will traditional wealth managers be affected by the phenomenon of the "robo advisor"? While allowing for natural scepticism in the face of media and tech hype, concerns are genuine. Deloitte has examined the field.

(This article first appeared in Family Wealth Report, a sister publication to this one and it is repeated here because the insights are relevant far beyond the shores of the US. We hope readers agree and welcome any feedback on this topic.)

It has been said that “robo” advisors, which are seizing trends related to technology and certain changes in investor behaviour, are not a threat to the high-end wealth management sector. They have been described as an industry misnomer by an executive at CLS Investments, for example, who believes that their existence has only reinforced the value of in-person advice rather than dilute it.

But they continue to be the topic of conversation among players of all stripes and Deloitte recently predicted that the market for robo advice is poised to explode to what could be a $5-7 trillion segment by 2025, representing 10 to 15 per cent of US retail assets under management.

High net worth firms have a little more time to adapt than wealth management firms that serve mass market or mass affluent clients; they may not need robo advice capabilities in the short term as much as some of their peers, but they have “no time to waste in terms of digitizing their operations,” Gauthier Vincent, Deloitte’s US wealth management leader and a principal at Deloitte Consulting, told Family Wealth Report.

“At stake is their ability to improve [their] client experience (with digital channels, for example), reduce risk and find new efficiencies,” Vincent said. “However, given the complexity of their clients’ needs as well as their clients’ purchasing power, advice will continue to be mostly human-based (as opposed to machine-based) and advisor-centric in the near future.”

There are four main components to robo advice, Deloitte outlined in its report, called Robo-Advisors: Industry Changers or Also-Rans?. They are: a rich digital user interface; personal surveys; automated portfolio allocation; and automated investment recommendations. Examples of such firms dominating the space include Betterment, FutureAdvisor and SigFig. While robo advice is currently generally limited to portfolio allocation and some investment recommendations, the report predicts that the term will come to encompass a much broader, holistic range of advice.

“This has already started to happen,” Vincent told this publication. Some robos use goals-based advisory frameworks that retail investors may have, for example – from wealth accumulation to the funding of healthcare costs or the purchase of a home. “So, advice is already becoming broader and more holistic,” he said. “But, in the future, we will see advice being further integrated across multiple fields including finances, health, leisure, home and others.”

Advanced analytics are currently applied mostly to help develop tailored portfolio allocations and rebalance portfolios dynamically, Vincent continued. Some robo advisors are also using analytics to segment their client base and test better ways to engage with them, he said. “But I believe we will see many more analytics-use cases being tested and rolled out in the next five to ten years.”

It won't just be independent fintech firms entering the fray; “we can expect much more competition”, with banks and insurers moving more deeply into the wealth management space, Vincent added. Indeed, firms with “deep pockets and large client bases” have already entered the market, according to the report.

The robo counter-argument

On the flip side of the robo growth argument, Deloitte noted that robo-advisor AuM is currently a “drop in the ocean”, representing less than $100 billion in a $30+ trillion market.

Meanwhile, traditional firms may fight back by adapting their advisory models, while thin margins, compressed by low fees and high client acquisition costs, hamper robo sustainability. Deloitte also noted that robos haven't shown exponential growth yet and have to overcome a trust deficit associated with new brands.

Asked what kind of wealth management firms should be thinking about how they can leverage the robo trend today or in the near future and why, Vincent said: “All kinds. All of them. But they will have to find their own way to build robo advisor capabilities and to compete in the marketplace.”

He explained: “For instance, brokerage firms will develop advisor-centric robo advisor capabilities to empower and further leverage their advisors. Banks will focus on cross-selling to their mass affluent clients to retain their lending and banking business. Large asset management companies will price robo advice at close to 0 basis points and make money on the sale of proprietary funds. Independent robo advisors will focus on staying nimble and innovative and come up with the best design and client engagement possible. In other words, each wealth management firm will need to find its own way to compete.”

Many high net worth clients will soon want a sleeve of their portfolios to be “robo-advised” - just like today they already want to invest in ETFs alongside more complicated instruments, Vincent added.

“Furthermore, continued advances in analytics (including in cognitive computing) will ultimately make it possible to broaden the scope of automated advice beyond what we have seen today,” he said. “High net worth clients will want access to that.”