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How has Digital Wealth Technology Evolved?

September 03, 2020


6 min read

Evolution of Robo-advisors

Today, the average person touches their phone an astronomical 2,617 times per day. That works out to be an average of 3 hours 10 minutes per day and just over 1,000 hours  on our mobile phones a year! It’s no surprise that the past decade have been labelled as the ‘digital era’

As part of the digital revolution, wealth tech too has experienced its own growth spurt. Introduced 12 years ago, Robo-advisors have evolved from a tool to a smart intuitive financial advisor capable of servicing clients of all levels on the wealth spectrum. 

Robo-advisor 1.0

The first Robo-advisor was brought to life in the aftermath of a financial crisis. It was the first of its kind, paving the way for the automated advisory services. 

The first-generation of Robo-advisor was developed to create a transparent and reliable investment advisory process based on objectivity- data rather than human instincts. As a result, it produced detailed, multi-format, and secure transactions, reducing the pressure from clients and regulators on the financial institutions.

To some degree, Robo-advisor 1.0 was just an augmentation of traditional advisory practices already in place. It was mainly a solution to help streamline tasks that were previously performed by financial advisors. 

The result? Increasing operational efficiency while lowering costs to improve return on investments for clients. 

However, this wasn’t enough. Like any new product, there was a lot of room for improvement. Even though there was a wide array of products to choose from – stocks, bonds, ETFs, and other investment vehicles – it still did not meet the basic requirements of investors. 

Investors, especially HNWI and UHNWIs, were looking for services that provide financial coaching, goal-based planning, and proactive adjustments, but Robo-advisor did not possess such capabilities yet. Hence, this new advisory service did not appeal to them and was not an option for consideration above the mass affluent. 

Robo-advisor 2.0

The upgrade from Robo-advisor 1.0. 

Taking into account feedback and demands from clients, the Robo-advisor evolved into its next generation – setting up accounts and order execution can be easily completed through the platform. 

Questionnaires are not only used to filter products recommendations, they can now allocate clients to pre-determined portfolios based on their risk profile. The assets allocation process is managed by a dedicated advisor. And once invested, the rebalancing and management of portfolios are performed by financial advisors. 

This whole investment process is still semi-automatic as investment managers are overseeing the algorithms and making changes accordingly. 

Nonetheless, it was an evolution of Robo 1.0 where the platform was able to integrate cognitive computing programs that interacted with clients directly; significantly lessening the workload of a human advisor. 

Overall, it is a more personalized and scalable digital wealth management solution. 

Robo-advisor 3.0

Here comes the next generation, where a majority of the current Robo-advisors are at. 

The onboarding process is pretty much the same as past generations. But the major differentiator comes down to the platform’s investment recommendations and portfolio management. 

Algorithms help determine the best investment decisions for each client – a fully personalized experience based on their financial goals. Not only that but there is little need to manage portfolios as the algorithms will ensure that clients’ goals are on the right track through automated rebalancing.

For clients who still want the human touch, don’t fear, it is still available. 

Some firms still offer consultation with their human advisors as an additional service to the Robos. No matter the circumstances, professionals are readily available whether it is for consultation or providing the final oversight on the investment progress.  

Robo-advisor 3.0 is a fully automated service that covers low to high-value capabilities. 

Robo-advisor 4.0

Robo-advisor 4.0, the new and improved high tech advisor to deliver a more engaging and personalized experience for investors and advisors. 

Starting from the onboarding process, questionnaires are more sophisticated to better profile and gauge the client’s risk. Machine learning can be deployed at this juncture to improve on the goal recommendations for the user.

Proceeding onto the next step of the investment process, it is fully automated – from investment strategies to the monitoring of portfolios. Portfolios are built based on algorithms and risk bands to construct investment classes tailored to your needs. This also means that it is able to shift different asset classes based on market conditions and major life changes as per your objectives and goals.

It doesn’t end there, there’s more. 

The interactive experience is far more advanced than any of its predecessors. Design thinking methodologies are applied to ensure the platform is designed to meet every individual user’s requirements. From curated questionnaires according to demographics to recommendations based on your current income and expenses, the modern Robo-advisor is now able to understand the client’s intentions and is capable of delivering a human-like advisory experience.

Source: Deloitte

Where is it Heading?

The Robo-advisory industry started just 12 years ago yet it has evolved fast. But it’s not stopping here. Robo-advisors will continue to push the boundaries of digital wealth. 

Source: Capgemini

Currently, the Robo-advisory industry is still in the innovation stage with many more improvements to be made. Additionally, the market share of automated advisory is still a small slice of the pie as compared to the traditional advice model that is performed by human advisors. There are still a handful of potential services that Robo-advisors can automate in the future. 

92.4% of clients are not fully satisfied with the state of digital wealth management with some reasons being: 

  1. “Robots cannot understand my questions and often give irrelevant answers”
  2. “There are too few questions that I can ask, leaving meaningful communication out of reach”
  3. “Robots are only capable of answering basic questions”

To integrate Robo-advisors into the current service offerings will help expand the client size and delivery efficiency. But it comes with its limitations as well. Thus, incorporating Robo-advisor does not mean completely eliminating the need for financial advisors. It should be used on a complimentary basis and not a replacement. 

The foundation for Robo-advisor is set and it is only going up from here. It is an opportunity for RIAs, wealth managers, and brokers to compete with the industry’s incumbent with the same advantage.

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