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Robo Advisors Will Stir Larger Manager Digital Spend

Traders Magazine Online News, October 4, 2018

John D'Antona Jr.

One research firm thinks that robo-advisory firms will push investment by larger full-service money managers.

In a new report from Moody’s, “Global Wealth Management:  Robo-advisors will stir sleeping giants at small incumbents' expense,” the research firm writes that in response to the increasing threat from robo-advisory fintech firms, larger wealth management companies will invest in greater digital capabilities to accompany their human advisors. This reaction from key players will be more disruptive to smaller incumbents than robo-advisors themselves.

Customers that are tech-savvy with lower balances in their portfolios and seeking lower fees are likely to be a robo-advisor’s target market. As such, wealth and asset management firms which hold a large number of accounts with lower balances are most at risk for migration to a robo-advisor. For companies that do not adapt or complement their advisory services, the threat is most pronounced.

From the report summary:

"Looming competition from robo-advisory fintechs, which manage assets with little or no human supervision, will drive large wealth management firms to invest in greater digital capabilities to complement their human advisory forces. This reaction from key players will likely accelerate consolidation in the sector and poses more of a threat to smaller incumbents than robo-advisors themselves. 

Traditional wealth managers rely on a large and costly force of financial advisors to build client relationships, grow assets and generate fees. Robo-advisory services are scalable, much less costly and attractive to tech-savvy customers who prefer digitally delivered advice. However, incumbents that can complement their human services with automated wealth management solutions will be armed to meet evolving customer expectations and prosper. conversely, pure robo-advisors that can add a human touch to their offerings are more likely to retain their fast-growing customer bases.

Robo-advisory adoption will rise among tech-savvy, financially confident customers, but personal advice will retain an important role. Though smaller balances can be managed via a uniform robo-advisory model, customers with large balances tend to have specialized needs that require the full attention of an advisor.
We expect customized, strategic advice to retain its value in helping high-net-worth customers navigate complex and evolving financial markets.

Financial advisor platforms catering to low-balance customers are most at risk. The threat will be most pronounced for companies that do not adapt and complement their traditional offerings with standalone robo-services or hybrid human/tech-based advice. But large, well-resourced incumbents have a strategic opportunity to integrate new technology into their operations, attract advisors via aggressive recruiting, acquire smaller firms or forge cooperative relationships with new advisory fintech partners.

Generational wealth transfer will place more assets in younger customers’ hands, working to the favor of the financial advisory sector as a whole. As the traditional baby boomer customer base for financial advice passes assets to the next generation, their heirs will need guidance on how to manage this newfound wealth. The US census bureau projects that 19% of the US population will be above age 65 by 2025, up from 15% now. Median net worth has also been increasing, and is highest among those aged 65 and above, increasing the transfer pool. Those firms with the best mix of robo and human advisory solutions will reap the most benefit from demographic changes."

Moody’s Analyst Fadi Abdel Massih added, “Wealth management firms that can complement their human services with automated wealth management solutions will be armed to meet evolving customer expectations and prosper. Conversely, pure robo-advisers that can add a human touch to their offerings are more likely to retain their fast-growing customer bases.”

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