How has Digital Wealth Technology Evolved?

Sep 03, 2020

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 has been labeled as the ‘digital era.’

As part of the digital revolution, wealth tech too has experienced its 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. 

Source: Deloitte

 

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 automated advisory services. 

Robo-advisors first-generation 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 clients’ pressure 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 investors’ basic requirements. 

Investors, especially HNWI and UHNWIs, were looking for services that provide financial coaching, goal-based planning, and proactive adjustments, but Robo-advisor did not yet possess such capabilities. 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. 

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

Questionnaires are used to filter product recommendations; they can now allocate clients to pre-determined portfolios based on their risk profile. A dedicated advisor manages the assets allocation process. 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 a human advisor’s workload. 

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 in past generations. But the major differentiator comes down to the platform’s investment recommendations and portfolio management. 

Algorithms help determine each client’s best investment decisions – 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 for consultation or providing the final oversight of 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, delivers a more engaging and personalized experience for investors and advisors.

In 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 portfolios’ monitoring. Portfolios are built based on algorithms and risk bands to construct investment classes tailored to your needs. This also means that it can shift different asset classes based on market conditions and significant 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.

Where is it Heading?

The Robo-advisory industry started just 12 years ago, yet it has evolved rapidly, and it’s not stopping for anyone here. As the astronomical usage of technologies continues to surge, Robo-advisors too will continue to push the ceiling of digital wealth higher. 

Source: Capgemini

 

Currently, the Robo-advisory industry is still in the innovation stage, with much room for improvements. Additionally, the automated advisory market share is still a small slice of the pie compared to the traditional advice model performed by human advisors – this represents a massive opportunity for wealth tech galore.

 

A word of caution though, 92.4% of clients survey said they are not satisfied with the current state of digital wealth management, citing examples such as: 

  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.”
  4. “It is emotionless and cold.”

 

To integrate Robo-advisors into one’s service offerings will indeed help expand the clientele base and delivery efficiency. But leveraging technology does not mean eliminating the need for humans; it should be used on a complimentary basis next to the human touch’s warmth. 

 

The foundations for Robo-advisors have been set in place, and the trajectory 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. 

 

At Bambu, we specialize in developing Robo-advisory solutions for the financial services industry, from smaller RIAs and wealth advisors to some of the world’s largest banks. We help our clients work through the above vital considerations to implement solutions that genuinely benefit their wealth management business. 

 

To find out more, check out our product here or contact us at sales@bambu.co for more information.