Picture investment recommendations tailored or customized to individual needs or personality traits, provided cheaply via a highly intuitive digital interface.
That’s not the high-cost human model that has sustained the wealth and portfolio management industry to date. So-called “robo-advisers” like Betterment, Personal Capital and Wealthfront are changing the face of wealth management.
Deloitte estimates that robo-advisers, which use algorithms to tailor portfolio allocation and investment recommendations to the individual, increased their assets under management (AUM) by a staggering 65%, to $19 billion, between April and December 2014. Although robo-advisers are tipped to “disrupt” the market by offering more tailored solutions at lower fees, their AUM is still dwarfed by that of conventional managers like Charles Schwab, which has also entered the robo-advisory fray with its automated investment advisory service Intelligent Portfolios. Bank of America is also reported to be launching a robo-adviser platform under its online trading platform, Merrill Edge.
For high-net-worth private banking clients with complex portfolios, the human touch is still the favored approach, according to “Bionic Wealth Management,” a report by Forbes Insights and Temenos: 62% of HNW clients still want to meet often with an adviser. But a third also say robo-advisers are “essential” because “technology is the best way to manage a portfolio.”
Yet markets commentator Chris Skinner, of the UK-based Financial Services Club, wonders: “How far can we automate investment management services? Can we really get to the stage when machines have judgment and can act like a human?”
Robo-advisers may not be about to supplant human wealth managers anytime soon, but that has not stopped regulators from raising concerns about the impact they, and other technological developments like cryptocurrencies and automated trading algorithms, could have on financial markets. A May 2016 working paper published by the Basel-based Bank for International Settlements warns that the “unintended consequences of technology-leveraged finance include fire sales, flash crashes, botched IPOs, cybersecurity breaches, catastrophic algorithmic trading errors, and a technological arms race that [creates] ...systemic risk in the financial ecosystem.” Skinner asks whether robotics in portfolio management would advance to a marketplace that has no losers.
“This is impossible, isn’t it?” he says. “There have to be losses somewhere.”
Regulators will also have t be wary of automation, because, as Skinner notes: “If something goes wrong, it goes wrong in an instant, which can result in substantial losses.”