A new wave of technologies – such as blockchain, digital wallets and robo-advice – is revolutionising the way money is being managed, controlled and distributed. Gone are the days where you had to enter a bank to carry out a transaction. Just whip out your smart phone with your mobile banking app and you’re set. In fact, today you can even seek financial advice courtesy of automated computer programs – no human interaction required.
Robo-advisors use computer programs to provide investment advice online, typically charge less than half the fees of traditional brokerages, which cost at least 1 percent of assets under management. The newer services will surge, managing as much as $2.2 trillion by 2020, according to consulting firm A.T. Kearney. Millennials and small investors aren’t the only ones using robo-advisors, a group that includes pioneers Wealthfront Inc. and Betterment LLC and services provided by mutual-fund giants. At Charles Schwab Corp., about 15 percent of those in automated portfolios have at least $1 million at the company.
Ways robo-advisors are changing the game for investors
- Less Expensive Investment Advice
Until recently, investment advisors was one of the last remaining professional industries to successfully resist the tidal wave of technology that has radically reformed nearly every other part of the economy. The technology enabling investor to know exactly what they will be charged for the services they are receiving. For example, most robo-advisors operate on a sliding fee scale, generally charging a smaller percentage based on the amount of money the client has under management. They may even charge a flat fee on small accounts. But even at the higher fee levels, robo-advisors are still considerably less expensive than traditional investment advisors.
- Easier to Compare Services
Since robo-advisor systems are based on well-defined program parameters, it’s much easier for investors to compare services and fees between various advisors. In the current environment, however, an investor can choose between the various robo-advisors’ services, or even maintain two or more at the same time. This is even more likely since different robo-advisors specialize in different investment strategies.
- Greater Use of Technology
To one degree or another investment industry has always relied on the latest technology. Using robo-advisors, investors now have liberal access to comparative data. Whatever information they want, and that will help them in making investment decisions, as well as track those decisions once made, is available on robo-advisor platforms. Robo-advisors provide the type of technologies younger investors are comfortable working with now. That technology can even prove to be decisive in the choice between using a traditional investment advisor and a robo-advisor.
- DIY Investing Options (aka Self-Service)
With the increase in technology, self-service is coming to every corner of the economy. We already see it in ATM machines, self-service gas stations, self-service checkout lines, and book-your-own travel packages. With robo-advisors, self-service is now coming to the investment world, making it easy for investors to DIY.
Though there are a variety of levels of human interface with robo-advisors, there’s unquestionably less than is the case with traditional investment advisors. While investors will pay less for the service, they will also have vastly less human contact. For the younger generation, who has been raised on such technology, this is a natural development.
- Increased Access to Investment Services
Perhaps the biggest change that robo-advisors are bringing is the availability of investment advisory services to the very small investor. Robo-advisors are reaching out to much smaller investors. For example, Wealthfront has a minimum account balance of $5,000, while Betterment has no account minimum at all (with a requirement to fund your account for at least $100 per month). In a real way, robo-advisors are democratizing investment advisory services by bringing professional investment management to virtually every investor in America, regardless of size.
Use cases that a Robo Advisor could consider:
- Trade related – a blockchain network could include the regulator, sell-side firms, custodians and may be even asset servicing firms. All depends on how much is outsourced.
- KYC – although robo advisors don’t have to do this today. It is only a matter of time before they are forced to follow KYC processes.