Robo-Advisors As A Disruptive Technology

Recently Robo-advisors have gone standard seeing that they have started to be liked by consumers. Once the domain of Silicon Valley, robo-advisors rely on computer algorithms to invest client assets in the best possible way and they have been increasingly offered by traditional financial players. Many people don’t understand when someone mentions robo-advisor, they think that it's about accounts being traded frequently; however, that's not the case. Robo-advisors offer managed accounts that consist largely of low-cost index mutual and exchange traded funds (ETFs). Since robo-advisors are not startups anymore, the perception of them is likely to evolve. Many financial services such as Fidelity, Morgan Stanley, JP Morgan Chase and Goldman Sachs are setting up their own robo-advisory platforms (Leonhardt, 2018). However, robo-advisors still do not control more than one-third of the assets of single mutual fund but there is a high possibility that it could change.

Looking at the technology improvement curve, it seen that during the initial phase this industry seems to struggle because this new technology is poorly being understood by many. However, as the time goes by and people learn more about this technology the performance curve seems to get better and eventually comes to dominating stages. In market robo-advisors performance have been excellent since last year, total assets managed by robo-advisors hit $222 billion which was more than double from the prior year (Leonhardt, 2018). The scope of robo-advisors is constantly growing in the market with growing features of robo-advisors. Some platforms such as Vanguard Personal Advisor and Personal Capital are offering a hybrid services which includes human advisors at times when needed. In addition, using robo-advisor is a cheaper option in some conditions. For example, typically clients pay human advisors about 1% to 2% of their investable assets annually for managing their portfolios; Robo-advisors is beneficial and cheaper where investors can start with as little as one dollar and the management fee is only about 0.36% (Leonhardt, 2018). These low prices and growing capabilities have pushed investors towards these platforms however, for robo-advisors to become more dominant solution they will have to reach out to broader audience.

There is definitely a dominant design for rob-advisors. Many companies and institutions are starting to implement them for their benefit. Robo-advisors, since the introduction in 2008, are steadily eating up market shares from their human counterparts just like Amazon and Netflix have taken from Walmart and Regal Cinema (Davenport, et al., 2018). From a study done by Deloitte, it is estimated that assets under automated management in US will grow $5 trillion to $7 trillion by year 2025 from $300 billion today; this includes assets under “robo-management” which will total $2.2 trillion by 2021 (Davenport, et al., 2018). The demand for machine intelligence is also growing in market. Corporations usually prefer human employees for their wise advice but their strategy is complex and that makes the advice expensive. Their advices are based on previous experiences and data-driven. This is the kind of problem that robo-advisors can solve and many companies are starting to use robo-advisors.

A disruptive innovation is that, when introduced, creates a new market and eventually adds up to existing market. Disruptive technologies have the potential to reinvent a product by bringing in new attributes that can become a source of competitive advantage. Initially not many customers tend to value such new attributes and breaking into mainstream remains a challenge because these technologies has very high chance to underperform on more established attributes that mainstream customers are used to. Disruption only occurs when these customers make the switch to new technology. This happens when the introduced product or technology performance on established attributes has improved to an acceptable level (Bohnsack & Pinkse, 2017).

In my Opinion robo-advisors is a disruptive technology. They are algorithms that invest and manage money behalf of an investor. Robo-advisor asks investor sets of questions to understand the objectives of investor like expected return and risk taking capacity. Based on the answers given by customers, algorithm then works out a unique strategy and recommends the asset classes that are more likely to satisfy investor in achieving their goals. Robo-advisors have been around for 10 years. People used to prefer human interaction back when it was introduced therefore, it wasn't as successful. Now that technology is becoming more advance with more and more people understanding it, it seems possible that people will start to understand the robo-advisors clearly. In addition, due to premium pricing in fees, people who like financial advice are unable to afford it. Robo-advisors being cheaper than traditional advisors are the solution for many people. Robo-advisors look to simplify investing as opposed to traditional performance parameters, seeking above-market return on investment (Gupta, 2017).

Robo-advisor’ targeted customers group is not customer base made up of individuals who already have some knowledge about finance and investing. Customers who are new and lack investing experience or cannot afford to hire a financial advisor are the main target of robo-advisors. Due to their low cost model, robo-advisors are preferably suited for investors looking to simplify the process of investing and managing wealth (Gupta, 2017). As we talked in previous question many incumbents are already trying to implement robo-advisors into their system to attract more customers and stay ahead of competition. Wealth management firm are at disadvantage due to robo-advisory solutions. This technology has been around for a long time but robo-advisors are making a breakthrough in introducing new ways to invest without having any prior knowledge and also cost less.

In today’s competitive age it is very vital to stay up-to-date in order to strive against the competition. Robo-advisors are digital platforms that use information technology to guide customers through an advisory process. Implementing robo-advisors extend existing advisory solution because they transform the complete traditional, human-to-human advisory process into digital, human-to-computer process. Robo-advisors replace the traditional in person interview process into online questionnaires and self-reporting process. This helps save customers their time and money. Robo-advisors manage customers return/risk expectations by algorithms and automated processes on digital platform.

Incumbents are rolling out with robo-advisor platform at quickening pace. Morgan Stanley, Citizens and Wells Fargo have announced digital advice product this year. Banks nowadays are forward thinkers about digital in general, for example, online banking. According to Gavin Spitzner, Principal Wealth Consulting Partners, we should expect a big digital wave from banks (Iskowitz, 2017). In December 2017, JPMorgan Chase announced that it will be launching a pilot early 2018. It is necessary to understand that many big companies are offering account solutions the similar way that they always have been but they call it a “robo” even if it’s not different solution (Leonhardt, 2018).

There has been research done where a working robo-advisor is advised based on the level of your expertise. For beginner, intermediate and advanced investors the advised robo-advisory services are Betterment Digital, Schwab Intelligent Advisory and Vanguard Personal Advisor Services, respectively (Leonhardt, 2018). Betterment Digital requires $0 minimum investment with average all-in cost of 0.36%, has a team of advisors available to answer via text or phone, no minimum to start investing and offers a wide range of investment tracking tools. Similarly, Schwab Intelligent Advisory for intermediate investors requires $25,000 minimum, with 0.15% average all-in cost, has option of video-chat or phone based system to get help from advisors and offers clients upgraded features such as the ability to sync up outside accounts to financial plan. Finally, Vanguard Personal Advisor Services for advanced investors requires $50,000 minimum investment with 0.38% average all-in cost, offers video chat or phone based system to get help from advisors and can help with retirement drawdown strategies as well as offers tools to help with spending advice and Social Security optimization. Despite of having many robo-advisor services there is still difficulties of finding the right one. However with the help of many resources out there the robo-advisory industry is finally starting to click with consumers.