Would you give the money earmarked for your children’s education or your retirement nest-egg to a computer algorithm, or so-called robo-advisor, to manage?
Data from Hitachi Vantara in the US shows that over 70% of those under the age of 40 are willing to do so.
Robo-advisory is currently one of the hottest topics in the financial services world. Investopedia defines robo-advisors as “digital platforms that provide automated, algorithm-driven financial planning services with little to no human supervision”.
It adds that a “typical robo-advisor collects information from clients about their financial situation and future goals through an online survey, and then uses the data to offer advice and/or automatically invest client assets”.
According to Hitachi, nearly 140 digital advisory companies have been launched since 2008, with over 80 of those founded in the past two years.
“Banks [are] beginning to make major changes in terms of their full-time employees in the wealth management space, and saying, ‘We are going to replace them with, in essence, robots’,” explained Dan Knight, chief technology officer for the Americas region in Hitachi Vantara’s financial services division. He was speaking at the recent Hitachi NEXT conference in Las Vegas, which How we made it in Africa attended.
According to Knight, digital investment services are still at the start of the maturity curve, somewhere between the birth and innovation phase.
Robo-advisors are also emerging in sub-Saharan Africa, particularly in South Africa, where insurance company Outsurance last month launched its Outvest platform that offers online goal-based advice and passive investment solutions by combining technology and human financial advisors based in a call centre.
“We’re living in a digital age where people are more comfortable using smart websites and apps to make decisions previously only entrusted to a face-to-face advisor,” commented Willem Roos, outgoing Group CEO of Outsurance.
South Africa also has a handful of other firms which offer robo-advisory investment services, including asset manager Sygnia which is led by outspoken CEO Magda Wierzycka; Anchor Capital backed Bizank; Smartrand, an online investment advice service powered by Galileo Capital; and Advicement, which was started by ex-investment banker Igor Rodionov in 2015.
By cutting out the middle man, robo-advisory platforms typically charge much lower fees than traditional investment offerings. However, Hitachi Vantara’s research found that price isn’t the number-one allure of these services. As the slide below shows, the top factors attracting people to digital advisory solutions are convenience (42%), simplicity (33%), and the fact that they are not being pushed products they don’t need (31%).
Digital investment solutions appeal to those who like to be in control and believe they can probably manage their investments as well as anybody else. “This is almost like someone who would go to Home Depot (US-based home-improvement store) versus calling a general contractor… This is someone who wants to stay in control, who trusts themselves instead of… someone else,” explained Knight.
He said the robo-advisory services currently available in the market fall into two camps: active and passive portfolio management. Active management involves ongoing analysis of investment options, and proposing shifts in asset allocation with a view of outperforming the market. Passive management platforms, on the other hand, might offer advice but won’t automatically make changes in portfolio allocation. Passive portfolios are also frequently restored to a pre-defined asset mix.
Existing financial institutions interested in offering robo-advisory to their clients have three options: building their own solution, partnering with a robo-advisory start-up, or acquiring such as a venture. Partnering with a start-up means established firms can quickly bring these services to market, and they are not directly responsible for maintenance and updates. The downside is that a third party now has access to the firm’s customer data. In addition, robo-advisory start-ups oftentimes won’t guarantee exclusivity, meaning competitors could offer the same solution.
Speaking at a recent convention hosted by the Financial Planning Institute of Southern Africa, Jacques Rossouw, managing director of financial services data provider Astute, suggested despite the anticipated growth in digital investment advice, humans will continue to play a role in the industry. “The reality is algorithms are here to stay and need to play a major part in the support structure of your advice that you impart to your clients. But where technology can only offer emojis, a financial planner can engage with compassion and a certain level of emotion. Emotion is what builds trust,” he said.