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Robo-advisors have been a hot topic for the past few years in the financial services industry. Many human advisors and firms began to feel threatened by this self-directed, digital alternative to financial advice, but trends within the robo-advice market are demonstrating that this concern may not be necessary. What does the current robo-advice market mean for the future of financial services? Let us highlight the main trends to watch in 2017 for more information.
Mergers & acquisitions
Within the past few years, many firms have recognized the success of robo-advice technology and have supplemented their offerings by acquiring a robo-advisor. With acquisitions such as Northwestern Mutual acquiring Learnvest, BlackRock acquiring Future Adviser, Invesco acquiring Jemstep, and more happening just in the past two years, it does not seem that this activity will be slowing down as more innovative capabilities are being added to robo-advice platforms.
According to Deloitte, 86 percent of private equity and 71 percent of corporate dealmakers expecting to close more deals in the next year. There is no doubt that these mergers and acquisitions will also affect the robo-advisor market and will continue the consolidation that has already been seen in this space.
While robo-advice platforms can prove useful for investors in all generations and wealth levels, they are heavily targeted at Millennials and mass affluent consumers. These target audiences are less willing to pay a high fee simply to use the piece of technology and will continue to seek a solution with the lowest price tag associated with the services.
As competition increases within the robo-advice market, the industry will continue to see self-directed platforms with extremely low account minimums. With these robo-advice fees dropping lower and lower, there is less intimidation and a low barrier to entry for consumers that will likely continue to entice them away from human financial advisors.
Just as the rest of the financial services industry is experiencing shifting and increasing regulation, robo-advisors are being held to a fiduciary standard as well. According to Advisor Perspectives, “The SEC guidance reiterates that robo-advisors, like any investment advisor, have a fiduciary duty to make full and fair disclosure of all material facts and to employ reasonable care to avoid misleading clients.”
Based on the fact that robo-advisors do not have the same reasoning skills as humans, FINRA and the SEC have expressed concerns over the accuracy of information and the possibility of providing misleading advice due to fault information and data entry. These concerns have brought the SEC to include “electronic investment advice” (or robo-advisors) to its annual list of examination priorities, demonstrating that this regulatory scrutiny will only increase and the industry moves forward.
Artificial intelligence & big data
Innovative capabilities are key to the success of digital platforms, and artificial intelligence and big data have become key components of robo-advice innovation. Robo-advisors platforms are leveraging artificial intelligence as a way to make these digital tools seem more human and trustworthy to further appeal to their target audience.
Adam Nash, CEO of Wealthfront, told WealthManagement.com, “We are entering the realm of building our platform for the future. [We have] a huge opportunity to deliver financial advice that is deeply personalized and relevant while getting a platform in place for AI’s increasing role.” As robo-advice technology continues to develop, AI and big data will continue to become more integrated within the investing, saving, and planning process.
Shifting focus to a hybrid advice model
While robo-advisors are consistently adding more innovation capabilities to further satisfy consumer needs and expectations, consumers still expect access to a human advisor as their financial situation becomes more complicated. According to Dan McElwee, executive vice president of Ventura Wealth Management, “It is foolish to rely solely on advice created by a formula. The best use of robo-platforms is when you pair it with commentary from a certified financial planner.”
Financial decisions can be very stressful and emotional, and no robo-advisor can discuss the different possibilities with empathy and human reasoning. Given the complexity of the financial industry, consumers are expecting human contact when making difficult decisions that may affect their future; therefore, more and more financial services firms will begin focusing on a hybrid advice model with digital tool supplemented by access to a human advisor.
To learn more about supplementing your client relationships with digital tools, click here.