Investment into robo-advisers has become a necessity for financial institutions. Cillian Leonowicz, senior manager consulting at Deloitte, explains why.
A tipping point is due soon; one where robo-advisers enter the mainstream, with savings and investments reaching a digital conclusion that was inevitable once banking went online.
Major developments at Wells Fargo and Citizens Bank (both, separately, teaming with Sigfox) and Charles Schwab & Co (releasing robo-adviser products) have shifted the sands of North American fintech.
In Europe, Cashboard (raising $3m) and Scalable Capital (passing over €100m in scalable assets) have caught the eye. In Asia, Nomura has finally entered the robo-adviser fray.
These all happened in the last four weeks, showing that robo-adviser projects are being taken up at breakneck speed.
We asked Cillian Leonowicz, senior manager consulting at Deloitte, what is going on.
How big of an industry is robo-advisory at the moment?
In 2015, the global assets under management for robo-advisory were approximately $0.5trn. This compares to $75trn in traditionally managed assets.
The figure, however, will grow from $0.5trn to an expected $16trn in 2025. This growth figure of approximately 32 times the market size today is in contrast to the expected growth of the traditional market, which is expected to grow to $137trn by 2025.
Can you explain the role of robots and analytics in the financial services industry.
Until recently, robots have played a small role in the financial services industry, save for gimmicks in advertisements, and more practically, the automation of process steps and the use of rules engines.
This has changed with the advent of new technologies including robo-advisory, which is powered by sophisticated algorithms and analytics, as well as through the increasing popularity of robotic process automation (RPA).
RPA is the application of robotics to automate the capture and processing of data in processes that have traditionally been carried out by back-office teams. New RPA capabilities are replacing manual processing and data capture, allowing staff to focus on more value-add activities, such as quality and customer servicing.
Analytics have always played a major role in the financial services industry, from liquidity and risk management right through to performance measurement and attribution.
The difference today is that firms are now treating their data as a major asset and using analytics to increase the overall customer experience through identification of trends and “right next step”; whilst simultaneously attempting to increase revenues and profitability through bespoke product offerings, as reflective of customer data that has been harvested.
Why can a robo-adviser offer a better service than, say, a standard financial adviser?
There is not a single answer as to why robo-advisers are offering better services, rather there are combination of factors and benefits:
- There are lower buy-in thresholds for investors
- They are accessible 24/7, 365 days a year, through a digitised front-end (mobile, online etc)
- Higher transparency, as all information is viewable on your dashboard
- They offer investors education through e-learning tools
- Robo-advisers are perceived as a cost-effective alternative to traditional fund products and purchasing approaches which, rightly or wrongly, have been deemed expensive
- Fees are clear and simple to understand
Does the move away from analytics-driven advice into a world of robo-advisers handling funds and investing accordingly spell a pivotal moment in financial services?
Yes and no. The rise of robo-advisers is seeing a shift in the market, with a large group of entry and mid-level retail investors – who were alienated due to high fees and entry thresholds – being able to gain financial information and access to products for a competitive price.
Whilst this is interesting, the impact of robots on other segments of the markets remains unclear … for example, in the wealth industry it would be unusual to see a family office being replaced by a robo-adviser.
What is clear, however, is that the rise of the robo-adviser, in conjunction with exchange-traded products, is putting the traditional business under greater scrutiny to justify both its performance and fee base.
Are banks using robo-advisers internally for things other than investments, such as customer management?
The uses of robo-advisers are not only customer-facing. There is a now branch of robo-advisory which is called robotic cognitive automation. This type of robo-adviser is being piloted in companies to undertake tasks such as managing a loan process or managing an insurance claims process; hereby automating a very manual process and cutting operational costs significantly.
Many people are intimidated by financial services; investing and saving often proving too complicated for some to get involved. Could automation such as this bring more people, and therefore more money, into the financial services sector?
We conducted a survey with a sample of our millennials workforce in the Irish Deloitte firm and saw some worrying results for the investment management industry. 81pc had not yet invested, 67pc didn’t know how to invest and 91pc wanted more education.
The rise of apps like Rubicoin alongside robo-advisers are only going to make the investment market more accessible for future generations, who want to be targeted through different channels. There is a massive opportunity here to turn this interest into significant gains for the financial services industry in the long term.