Robo-advisor changes the concept of wealth management

March 1, 2017

The concept of “robo-advice”–the use of automation and digital techniques to build and manage portfolios of exchange-traded funds (ETFs) and other instruments for investors–has gained significant attention within the wealth management industry. Much of the initial uptake and interest in robo-advice is coming from the “mass-affluent, delegator” market segment, which has traditionally been underserved. Robo-advice capabilities offer particular benefits to insurance companies as a way of expanding their presence in wealth management while allowing agents to maintain their focus on insurance sales. Overall, we believe robo-advice capabilities will effect profound and permanent changes in the way advice is delivered.

Robo-Advice Capabilities

Robo-advice streamlines the account opening process, and its ability to transfer assets is increasing. All in all, it represents a useful basket of services at an attractive price, but today it won’t meet the needs of investors with even moderately complex financial lives.

In developing a financial plan, they can assimilate multiple goals, including college savings, planned home purchases, retirement, protection needs, estate planning and the need for health care and/ or long term care coverage. In proposing investment solutions, they will be able to incorporate outside assets, handle individual securities, ladder bond portfolios, consider low tax basis holdings, and allocate around illiquid positions.

Robo-Advice will help clients understand their portfolios by providing information and learning in the context of the financial results and market information being presented.

Impact on the Business Model Over time,

Robo-advice will have a significant effect on the wealth management business model. Investors who have low-cost and reasonably effective alternatives to traditional wealth management programs will not be willing to pay premium prices unless they see real differentiation and value. This may come in the form of demonstrably better performance in terms of investment management or in the provision of value-added services by wealth management firms.

Next Steps for Wealth Managers

Wealth management firms evaluating their options related to robo-advice should evaluate five key considerations:

  • Whether the needed technology and solutions will be developed in-house, through a partnership, or via the acquisition of an existing provider.
  • 2How the robo-advice will be positioned—as a stand-alone offering, as part of a full-service financial advisory package, or as a hybrid of the two.
  • 3Whether the firm has the analytics and market segmentation in place to identify the most likely robo-advice customers and to obtain the information and insights needed to work effectively with them.
  • How the product will deliver an intuitive and satisfying customer experience. This is typically achieved through an iterative process involving prototypes, client labs and rapid revisions and enhancements.
  • How the offering will roll out via internal and external marketing initiatives and through change management programs undertaken with the sales force.

 Advantages of opting for a Robo-Advisor

  • Low Fees

Human investment advisors typically charge at least 1% to 2% of the value of your portfolio as a management fee. The percentage may be even higher on a smaller portfolio.

Robo advisors typically charge just a fraction of 1% as a management fee. For example, Wealthfront charges just 0.25% as a management fee – and the first $10,000 is managed for free! Betterment charges a sliding scale ranging from a high of 0.35% to a low of 0.15%. Fees charged by many robo advisors decrease as you have more funds under management.

  •  Regular Rebalancing

It’s just a question of time before even a well allocated portfolio gets out of balance. Changes in asset categories – either higher or lower – distort your allocation. For this reason, your portfolio needs to be rebalanced. At a minimum, it needs to be done at least once a year. But more frequently is even better, since markets can shift by double-digit percentages in a matter of weeks.

Many robo advisors will also work to simplify your investment portfolio to decrease overlap in the types of funds you have, and to reduce the management fees of your holdings. This alone can produce significant gains. See our Personal Capital review for an example of how this works.

  • Tax-Efficient Investing

As every seasoned investor knows, taxes can have a major impact on your investment rate of return. This is particularly true of capital gains, and especially of short-term capital gains since they are taxed at regular income tax rates.

Since they are fully automated, robo advisors are constructed in such a way that they minimize capital gains taxes.

One of the ways they do this is by investing through index based ETFs. Since such funds are based on the underlying index, trading within the fund only occurs when the index changes. Since that happens so infrequently, these ETF’s produce very little in the way of capital gains.

  • Low Minimum Initial Investment Requirements

As noted above, human investment managers often have initial investment requirements of several hundred thousand dollars. Most robo advisors require no more than a few thousand dollars. Some have no minimum requirements at all.

The Anglo African team can assist you in unlocking the full potential of FinTech for the prosper of your business. If you have any queries, or if you would like further information, please contact us on 2331636 or by e-mail at

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